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WHEN all but the last of the following chapters were 
already in type, I was offered a seat on the Eoyal 
Commission (1913) on Indian Finance and Currency. 
If my book had been less far advanced, I should, of 
course, have delayed publication until the Commission 
had reported, and my opinions had been more fully 
formed by the discussions of the Commission and by 
the evidence place'd before it. In the circumstances, 

however, JUbave^ decided to publish immediately 

V '-" **. "\ \ 
what I Md already ^Written, without the addition of 

certain other chapters which had been projected. The 
book, as it now stands, is wholly prior in date to 
the labours of the Commission. 


12th, May 1913. 








PAPER CURRENCY . . . . . .37 








BALANCES . . . . . .124 




INDIAN BANKING . . . . , .195 



INDEX . , . . . . .261 


BANK OF BENGAL .... Face page 2 40 



1. ON the broad historical facts relating to Indian 
currency, I do not intend to spend time. It is 
sufficiently well known that until 1893 the currency 
of India was on the basis of silver freely minted, 
the- gold value of the rupee fluctuating with the gold 
value of silver bullion. By the depreciation in the 
gold value of silver, extending over a long period of 
years, trade was inconvenienced, and Public Finance, 
by reason of the large payments which the Govern- 
ment must make in sterling, gravely disturbed ; until 
in 1893, after the breakdown of negotiations for 
bimetallism, the Indian Mints were closed to the 
free mintage of silver, and the value of the rupee 
divorced from the value of the metal contained in 
it. By withholding new issues of currency, the 
Government had succeeded by 1899 in raising the 
gold value of the rupee to Is. 4d., at which figure it 
has remained without sensible variation ever since. 

2. There can be no douj)t that at first the Govern- 
ment of India did not fully understand the nature of 

i B 


the new system ; and that several minor mistakes were 
made at its inception. But few are now found who 
dispute on broad general grounds the wisdom of the 
change from a silver to a gold standard. 

Time has muffled the outcries of the silver 
interests, and time has also dealt satisfactorily with 
what were originally the principal grounds of criticism, 

(1) that the new system was unstable, 

(2) that a depreciating currency is advantageous 

to a country's foreign trade. 

3. The second of these complaints was urged with 
great persistency in 1893. The depreciating rupee 
acted, it was said, as a bounty to exporters ; and the 
introduction of a gold standard, so it was argued, 
would greatly injure the export trade in tea, corn, and 
manufactured cotton. It was plainly pointed out by 
theorists at the time (a) that the advantage to 
exporters was largely at the expense of other members 
of the community and could not profit the country 
as a whole, and (b) that it could only be temporary. 

The recent spell of rising prices in India has 
shown clearly in how many ways a depreciating 
currency damages large sections of the community, 
although it may temporarily benefit other sections. 
In fact, some recent complaints against the existing 
currency policy have been occasioned by the tendency 
of prices to rise ; whereas it is plain that the great 
change of 1893 must have tended to make them fall, 


and that rupee prices would, in all probability, be 
higher than they now are, if the change had not been 

With regard to the temporary nature of the effect 
on exporters, experience has decisively supported 
theory. The nature of this experience was admirably 
summed up by Mr. J. B. Brunyate in the Legislative 
Council (February 25, 1910), speaking in reply to 
the similar line of argument brought forward by the 
Bombay mill-owning interests in connexion with the 
imposition in 1910 of a duty on silver. 1 

1 Mr. Brunyate spoke as follows : " Many here will remember the 
arguments used on behalf of the tea-planting industry. At that time India 
and China had been competing together for years on the same footing as 
regards currency. It was argued that the disturbance of the exchange, the 
appreciation of the- rupee and the depreciation of silver, might not only result 
in India's ascendancy in regard to tea being wrested from her, but in the 
entire and irretrievable ruin of the tea industry. I am quoting the words 
actually used by the Darjeeling Planters' Association in 1892. In the year 
before the closing of the Mints India exported 115 million pounds of tea to 
foreign countries, and by 1909 had a little more than doubled that amount. 
Almost exactly the same arguments were used in regard to the cotton industry, 
and here I must enter into more detail, "What the mill-owners feared, and 
had excellent reason for fearing, was an enormous depreciation in silver. 
This actually took place. In 1892-93, the year before the Mints were closed, 
the average value of silver per ounce was nearly 40d. The next year it fell to 
33j|d. ; the year after to about 29d.; and it stayed at or below SOd, for some 
years. Surely here were the conditions in which a disastrous stimulus to 
production in China might have been expected. The so-called bounty in 
this case was not 2 per cent but 25 per cent. It was not a temporary 
decline which might be counterbalanced by other causes in the course of a 
single month. It continued for years, and as wo all know silver has not 
since returned to a price anything like 40d. an ounce. In addition, just 
before the closing of the Mints occurred there had been considerable over- 
trading, and the mills had actually been working short time for some months 
before to enable the Chinese markets to dispose of their accumulated stocks. 
There was, as a matter of fact, a fall in exports in 1893-94 partly due to the 
dislocation arising from the changes in our currency system and partly to the 
existing glut of the Chinese market The exports picked up, however, in 
1894-95, and it would appear that the adjustment of prices and wages in 


4 The criticisms of 1893, therefore, are no longer 
heard, and the Currency Problems with which we are 
now confronted are new. The evolution of the 
Indian currency system since 1899 has been rapid, 
though silent. There have been few public pro- 
nouncements of policy on the part of Government, 
and the legislative changes have been inconsiderable. 
Yet a system has been developed, which was con- 
templated neither by those who effected nor by those 
who opposed the closing of the Mints in 1893, and 
which was not favoured either by the Government or 
by the Fowler Committee in 1899, although some- 
thing like it was suggested at that time. It is not 
possible to point to any one date at which the cur- 
rency policy now in force was deliberately adopted. 

The fact that the Government of India have drifted 
into a system and have never set it forth plainly is 
partly responsible for a widespread misunderstanding 
of its true character. But this economy of explanation, 
from which the system has suffered in the past, does 

China to the extraordinary new conditions began very quickly, for I find 
it stated that by the first month of 1894 the mills were again working 
steadily and profitably. I may perhaps give the actual figures. In 1891-92 
the exports of yarn had been 161 million pounds. In 1892-93 the inflated 
year just preceding the closing of the Mints, they rose to 189 million pounds. 
In 1893-94 they fell (as I have said) to 134 millions, but went up again the 
following year to 159 millions. In 1902-3 and 1903-4, though by this 
time the value of silver had now fallen to 24d., the exports were about 
250,000,000 pounds, and in 1905-6 they reached the record figure of 298 
millions. In the last two or three years there has been a falling off, owing 
to various causes, but the amount exported in 1908-9 was as much as 235 
millions, and in the exports to China in particular there was a marked 


not make it any the worse intrinsically. The prophecy 
made before the Committee of 1898 by Mr. A. M. 
Lindsay, in proposing a scheme closely similar in 
principle to that which was eventually adopted, has 
been largely fulfilled. "This change/' he said, "will 
pass unnoticed, except by the intelligent few, and it 
is satisfactory to find that by this almost imper- 
ceptible process the Indian currency will be placed on 
a footing which Ricardo and other great authorities 
have advocated as the best of all currency systems, 
viz., one in which the currency media used in the 
internal circulation are confined to notes and cheap 
token coins, which are made to act precisely as if 
they were bits of gold by being made convertible 
into gold for foreign payment purposes." 

5. In 1893 four possible bases of currency 
seemed to hold the field: debased and depreciating 
currencies usually of paper ; silver ; bimetallism ; and 
gold. It was not to be supposed that the Govern- 
ment of India intended to adopt the first ; the second 
they were avowedly upsetting; the third they had 
attempted, and had failed, to obtain by negotiation. 
It seemed to follow that their ultimate objective 
must be the last namely, a currency of gold. The 
Committee of 1892 did not commit themselves; but 
the system which their recommendations established 
was generally supposed to be transitional and a first 
step towards the introduction of gold. The Com- 
mittee of 1898 explicitly declared themselves to be 


in favour of the eventual establishment of a gold 

This goal, if it was their goal, the Government of 
India have never attained, The rupee is still the 
principal medium of exchange and is of unlimited 
legal tender. There is no legal enactment compelling 
any authority to redeem rupees with gold. The 
fact that since 1899 the gold value of the rupee has 
only fluctuated within narrow limits is solely due to 
administrative measures which the Government are 
under no compulsion to undertake. What, then, is 
the present position of the rupee ? 

6. The main features of the Indian system as now 
established are as follows : 

(1) The rupee is unlimited legal tender and, so 
far as the law provides, inconvertible. 

(2) The sovereign is unlimited legal tender at l 
to 15 rupees, and is convertible at this rate, so long 
as a Notification issued in 1893 is not withdrawn, 
i.e., the Government can be required to give 15 rupees 
in exchange for 1. 

(3) As a matter of administrative practice, the 
Government is, as a rule, willing to give sovereigns 
for rupees at this rate; but the practice is some- 
times suspended and large quantities of gold cannot 
always be obtained in India by tendering rupees. 

(4) As a matter of administrative practice, the 
Government will sell in Calcutta, in return for rupees 
tendered there, bills payable in London in sterling 


at a rate not more unfavourable than Is. 3f|d. per 

The fourth of these provisions is the vital one for 
supporting the sterling value of the rupee; and, 
although the Government have given no binding under- 
taking to maintain it, a failure to do so might fairly 
be held to involve an utter breakdown of their system. 

Thus the second provision prevents the sterling 
value of the rupee from rising above Is. 4d. by more 
than the cost of remitting sovereigns to India, and 
the fourth provision prevents it from falling below 
Is. 3ff d. This means in practice that the extreme 
limits of variation of the sterling value of the rupee 
are Is. 44-d. and Is. 3|4d. 

O O <U 

7. The important characteristics of the Indian 
system are so much a matter of notification and 
administrative practice that it is impossible to point 
to single Acts which have made the system what it 
is. But the following list of dates may be useful 
for purposes of reference : 

1892. Herschell Committee on Indian Currency. 

1893. Act closing the Indian mints to the coinage of 

silver on private account. Notifications by Govern- 
ment fixing the rate, at which rupees or notes 
would be supplied in exchange for the tender of 
gold, at the equivalent of Is. 4d. the rupee. 

1898. Fowler Committee on Indian Currency. Exchange 

value of rupee touched Is. 4d. 

1899. Act declaring the British sovereign legal tender at 

Is. 4d, to the rupee. 


1899-1903. Negotiations for coinage of sovereigns in India 

(dropt indefinitely Feb. 6, 1903). 
1900. Gold Standard Reserve instituted out of profits of 


1904. Secretary of State's notification of Ms willingness to 

sell Council Bills on India at Is. 4Jd. the rupee 
without limit. 

1905. Act authorising the establishment of the Currency 

Chest of " earmarked " gold at the Bank of England 
as part of the Currency Eeserve against notes, 1 
and the investment of a stated part of the Currency 
Eeserve in sterling securities. 

1906. The Notification withdrawn which had directed the 

issue of rupees against the tender of gold (as dis- 
tinguished from British gold coin). 

1907. Eupee branch of the Gold Standard Eeserve instituted. 

1908. Sterling drafts sold in Calcutta on London at 

Is. 3|-|d. the rupee, and cashed out of funds from 

the Gold Standard Eeserve. 
1910. Act rendering Currency notes of Es. 10 and 50 

universal legal tender, 2 and directing the issue of 

notes in exchange for British gold coins. 
1913. Eoyal Commission on Indian Finance and Currency. 

8. In 6 I have stated the practical effect of 
these successive measures. But the legal position is so 
complicated and peculiar, that it will be worth while 
to state it quite precisely. Previous to 1893 the 
Government were bound by the Coinage Act of 1870 
to issue rupees, weight for weight, in exchange for 
silver bullion. There was also in force a Notification 
of the Governor-General in Council, dating from 1868, 

1 There had been temporary Acts to the same effect in 1898 and 1900. 

2 Notes of Ks. 100 were universalised in 1911 by Notification under this 



by which sovereigns were received at Government 
Treasuries as the equivalent of ten rupees and four 
annas. This Notification, which had superseded a 
Notification of 1864 fixing the exchange at ten rupees, 
had long been inoperative (as the gold exchange 
value of ten rupees four annas had fallen much below 
a sovereign). The Act of 1893 was merely a repeal- 
ing Act, necessary in order to do away with those 
provisions of the Act of 1870 which provided for the 
free mintage of silver into rupees. At the same time 
(1893) the Notification of 1868 was superseded by a 
new Notification fixing fifteen rupees as the rate at 
which sovereigns would be accepted at Government 
Treasuries ; and a Notification was issued under the 
Paper Currency Act of 1882, directing the issue of 
currency notes in exchange for gold at the Rs, 15 to 
1 ratio. The direct issue of rupees against the 
tender of gold also has been regulated by a series of 
Notifications, of which the first was published in 
1893, up to 1906 rupees being issued against either 
gold coin or gold bullion; and since 1906 against 
sovereigns and half-sovereigns only. Apart from 
Notifications, an Act of 1899 declared British 
sovereigns legal tender at the Rs. 15 to 1 ratio, 
an indirect effect of which was to make it possible for 
Government, so far as Acts are concerned, to redeem 
notes in gold coin and refuse silver. And lastly, the 
Paper Currency Act of 1910 bound the Government 
to issue notes against the tender of British gold coin. 


The convertibility of the sovereign into rupees at 
the Ks. 15 to 1 ratio is not laid down, therefore, 
in any Act whatever. It depends on Notifications 
withdrawable by the Executive at will Further, 
the management of the Gold Standard Eeserve 
is governed neither by Act nor by Notification, but 
by administrative practice solely ; and the sale of 
Council Bills on India and of sterling drafts on 
London is regulated by announcements changeable at 
administrative discretion from time to time. 

All this emphasises the gradual nature of the 
system's growth, and the transitional character of 
existing legislation. As matters now are, there is 
something to be said for a new Act, which, while 
leaving administrative discretion free where there is 
still good ground for this, might consolidate and 
clarify the position. 

9. As a result of these various measures, the rupee 
remains the local currency in India, but the Govern- 
ment take precautions for ensuring its convertibility 
into international currency at an approximately stable 
rate. The stability of the Indian system depends 
upon their keeping sufficient reserves of coined 
rupees to enable them at all times to exchange inter- 
national currency for local currency; and sufficient 
liquid resources in sterling to enable them to change 
back the local currency into international cur- 
rency, whenever they are required to do so. The 
special features of the system, although, as we shall 


see later, these features are not in fact by any 
peculiar to India, are : first, that the actual medium 
of exchange is a local currency distinct from the 
international currency ; second, that the Government 
is more ready to redeem the local currency (rupees) 
in bills payable in international currency (gold) at 
a foreign centre (London) than to redeem it outright 
locally ; and third, that the Government, having taken 
on itself the responsibility for providing local currency 
in exchange for international currency and for changing 
back local currency into international currency when 
required, must keep two kinds of reserves, one for 
each of these purposes. 

I will deal with these characteristics in successive 
chapters. It is convenient to begin with the second 
of them and at the outset to discuss in a general 
way the system of currency, of which the Indian 
is the most salient example, known to students as 
the Gold-Exchange Standard. Then we will take 
the first of them in Chapters III. and IV. on Paper 
Currency and on the Present Position of Gold in 
India and Proposals for a Gold Currency ; and the 
third in Chapter VI. on the Secretary of State's 

10. But before we pass to these several features of 
the Indian system, it will be worth while to emphasise 
two respects in which this system is not peculiar, 
In the first place a system, in which the rupee is 
maintained at Is. 4d. by regulation, does not affect 


the level of prices differently from the way in which 
it would be affected by a system in which the rupee 
was a gold coin worth Is. 4d., except in a very 
indirect and unimportant way to be explained in 
a moment So long as the rupee is worth Is. 4d. in 
gold, no merchant or manufacturer considers of what 
material it is made when he fixes the price of his 
product. The indirect effect on prices, due to the 
rupee's being silver, is similar to the effect of the use 
of any medium of exchange, such as cheques or notes, 
which economises the use of gold. If the use of gold 
is economised in any country, gold throughout the 
world is less valuable gold prices, that is to say, are 
higher. But as this effect is shared by the whole world, 
the effect on prices in any country of economies in 
the use of gold made by that country is likely to be 
relatively slight. In short, a policy which led to a 
greater use of gold in India would tend, by increasing 
the demand for gold in the world's markets, some- 
what to lower the level of world prices as measured 
in gold ; but it would not cause any alteration worth 
considering in the relative rates of exchange of Indian 
1 and non-Indian commodities. 

In the second place, although it is true that the 
maintenance of the rupee at or near Is. 4d. is due 
to regulation, it is not true, when once Is. 4d. rather 
than some other gold value has been determined, that 
the volume of currency in circulation depends in the 
least upon the policy of the Government or the caprice 


of an official. 1 This part of the system is as perfectly 
automatic as in any other country. The Government 
has put itself under an obligation to supply rupees 
whenever sovereigns are tendered, and it often permits 
or encourages the tender of sovereigns in London as 
well as in India ; but it has no power or opportunity 
of forcing rupees into circulation otherwise. In two 
matters only does the Government use a discretionary 
power. First, in order that it may always be possible 
to fulfil this obligation, it is necessary to keep a certain 
reserve of coined rupees, just as some authority in 
this country in point of fact the Bank of England 
must keep some reserve of token silver and coined 
sovereigns and not hold in its vaults too large a 
proportion of uncoined or foreign gold. The magni- 
tude of this reserve is within the discretion of the 
Indian Government To a certain extent they must 
anticipate probable demands on the output of the 
Mint. But if they miscalculate and mint more than 
they need, the new rupees must lie in the Government's 
own chests until they are wanted, and the date at 
which they emerge into circulation it is beyond the 
power of the Government to determine. In the second 

1 The Hon. Mr. Dadabhoy, speaking in the Legislative Council in 1910, 
argued that "the harmful effects of a further fall in silver (i.e. in its hullion 
value) can "be neutralised by Government by creating a further contraction 
in the volume of the currency, and thus producing a greater scarcity of the 
rupee, by maintaining the Gold Standard Keserve at a higher figure, and, 
further, by more frequent withdrawal of Council Bills from the market." A 
contraction of the currency would not, of course, have the effect supposed, 
but the Government could not, in fact, bring about a contraction in the 
manner described. 


place, the Government can postpone for a short time 
a demand for rupees by refusing to supply them in 
return for sovereigns tendered in London and by 
insisting upon the sovereigns being sent to Calcutta. 
Sometimes they do this, but very often it is worth 
their while, for reasons to be explained in detail later 
on, to accept the tender of sovereigns in London. 
In either of these cases the permanent effect of their 
action one way or the other on the volume of circu- 
lation is inconsiderable. The kind of difference it 
makes is comparable to the difference which would 
be made if it lay within the discretion of a government 
to charge or not, as it saw fit, a small brassage not 
much greater than the cost of coining. 1 

1 This question of the power of Government over the volume of circulation 
is discussed in much greater detail in 8 of Chapter V. 



1. IF we are to see the Indian system in its proper 
perspective, it is necessary to digress for a space to a 
discussion of currency evolution in general. 

My purpose is, first, to show that the British 
system is peculiar and is not suited to other condi- 
tions ; second, that the conventional idea of " sound " 


currency is chiefly derived from certain superficial 
aspects of the British system ; third, that a somewhat 
different type of system has been developed in most 
other countries; and fourth, that in essentials the 
system which has been evolved in India conforms to 
this foreign type. I shall be concerned throughout 
this chapter with the general characteristics of cur- 
rency systems, not with the details of their working. 
2. The history of currency, so far as it is relevant 
to our present purpose, virtually begins with the 
nineteenth century. During the second quarter of 
this century England was alone in possessing an 
orthodox " sound" currency on a gold basis, Gold 
was the sole standard of value ; it circulated freely 



from hand to hand; and it was freely available for 
export. Up to 1844 bank notes showed a tendency 
to become a formidable rival to gold as the actual 
medium of exchange. But the Bank Act of that year 
set itself to hamper this tendency and to encourage 
the use of gold as the medium of exchange as well 
as the standard of value. This Act was completely 
successful in stopping attempts to economise gold by 
the use of notes. But the Bank Act did nothing to 
hinder the use of cheques, and the very remarkable 
development of this medium of exchange during the 
next fifty years led in this country, without any 
important development in the use of notes or tokens, 
to a monetary organisation more perfectly adapted for 
the economy of gold than any which exists elsewhere. 
In this matter of the use of cheques Great Britain 
has been followed by the rest of the English-speaking 
world Canada, Australia, South Africa, and the 
United States of America. But in other countries 
currency evolution has been, chiefly, along different 

3. In the early days of banking of the modern 
type in England, gold was not infrequently required 
to meet runs on banks by their depositors, who were 
always liable in difficult times to fall into a state of 
panic lest they should be unable to withdraw their 
deposits in case of real need. With the growth 
of the stability of banking, and especially with 
the growth of confidence in this stability amongst 


depositors, these occasions have become more and 
more infrequent, and many years have now passed 
since there has been any run of dangerous proportions 
on English banks. Gold reserves, therefore, in Great 
Britain are no longer held primarily with a view 
to emergencies of this kind. The uses of gold coin 
in Great Britain are now three as the medium of 
exchange for certain kinds of out-of-pocket expendi- 
ture, such as that on railway travelling, for which 
custom requires cash payment; for the payment 
of wages ; and to meet a drain of specie abroad. 

Fluctuations in the demand for gold in the first 
two uses are of secondary importance, and can usually 
be predicted with a good deal of accuracy, at holiday 
seasons, at the turn of the quarter, at the end of the 
week, at harvest Fluctuations in the demand in the 
third use are of greater magnitude and, apart from 
the regular autumn drain, not so easily foreseen. 
Our gold reserve policy is mainly dictated, therefore, 
by considerations arising out of the possible demand 
for export. 

To guard against a possible drain of gold abroad, 
a complicated mechanism has been developed which 
in the details of its working is peculiar to this 
country. A drain of gold can only come about if 
foreigners choose to turn into gold claims, which they 
have against us for immediate payment, and we have 
no counterbalancing claims against them for equally 
immediate payment. The drain can only be stopped 


if we can rapidly bring to bear our counterbalancing 
claims. When we come to consider how this can best 
be done, it is to be noticed that the position of a 
country which is preponderantly a creditor in the 
international short-loan market is quite different from 
that of a country which is preponderantly a debtor. 
In the former case, which is that of Great Britain, it 
is a question of reducing the amount lent; in the 
latter case it is a question of increasing the amount 
borrowed. A machinery which is adapted for action 
of the first kind may be ill suited for action of the 
second. Partly as a consequence of this, partly as a 
consequence of the peculiar organisation of the London 
Money Market, the "bank rate" policy for regulating 
the outflow of gold has been admirably successful in 
this country, and yet cannot stand elsewhere unaided 
by other devices. It is not necessary for the purposes 
of this survey to consider precisely how changes 
in the bank rate affect the balance of immediate 
indebtedness. It will be sufficient to say that it tends 
to hamper the brokers, who act as middlemen 
between the British short-loan fund and the foreign 
demand for accommodation (chiefly materialised in the 
offer of bills for discount), and to cause them to enter 
into a less volume of new business than that of 
the short loans formerly contracted and now falling 
due, thus bringing to bear the necessary counter- 
balancing claims against foreign countries. 

4. The essential characteristics of the British 


monetary system are, therefore, the use of cheques as 
the principal medium of exchange, and the use of the 
bank rate for regulating the balance of immediate 
foreign indebtedness (and hence the flow, by import 
and export, of gold). 

5. The development of foreign monetary systems 
into their present shapes began in the last quarter of 
the nineteenth century. At that time London was 
at the height of her financial supremacy, and her 
monetary arrangements had stood the test of time 
and experience. Foreign systems, therefore, were 
greatly influenced at their inception by what were 
regarded as the fundamental tenets of the British 
system. But foreign observers seem to have been 
more impressed by the fact that the Englishman had 
sovereigns in his pocket than by the fact that he had 
a cheque-book in his desk ; and took more notice of 
the " efficacy " of the bank rate and of the delibera- 
tions of the Court of Directors on Thursdays, than 
of the peculiar organisation of the brokers and the 
London Money Market, and of Great Britain's position 
as a creditor nation. They were thus led to imitate the 
form rather than the substance. When they intro- 
duced the gold standard, they set up gold currencies 
as well ; and in several cases an official bank rate 
was established on the British model Germany led 
the way in 1871-73. Even now apologists of the 
Reichsbank will sometimes speak as if its bank rate 
were efficacious by itself in the same manner as the 


Bank of England's. But, in fact, the German system, 
though ostensibly modelled in part upon the British 
system, has become, by force of circumstances, 
essentially different. 

It is not necessary for this survey to consider 
individual systems in any detail. But, confining 
ourselves to European countries, whether we con- 
sider, for example, France, Austria-Hungary, Russia, 
Italy, Sweden, or Holland, while most of these 
countries have a gold currency and an official Bank 
Bate, in none of them is gold the principal medium of 
exchange, and in none of them is the bank rate their 
only habitual support against an outward drain of gold. 

6. With the use of substitutes for gold I will deal 
in Chapter IV. in treating of the proper position of 
gold in the Indian system. But what props axe 
commonly brought to the support of an " ineffective " 
Bank Eate in countries other than Great Britain ? 
Roughly speaking, there are three. A very large 
gold reserve may be maintained, so that a sub- 
stantial drain on it may be faced with equanimity ; 
free payments in gold may be partially suspended ; 
or foreign credits and bills may be kept which can be 
drawn upon when necessary. The Central Banks of 
most European countries depend (in varying degrees) 
upon all three. 

The Bank of France uses the first two/ and her 

1 For example, in November 1912, "no gold was handed across the 
counter at the Bank of France except on the most urgent demand, and then 


holdings of foreign bills are not, at normal times, 
important. 1 Her bank rate is not fixed primarily with 
a view to foreign conditions, and a change in it is 
usually intended to affect home affairs (though these 
may of course depend and react on foreign affairs). 

Germany is in a state of transition, and her 
present position is avowedly unsatisfactory. The 
theory of her arrangements seems to be that she 
depends on her bank rate after the British model; 
but in practice her bank rate is not easily rendered 
effective, and must usually be reinforced by much 
unseen pressure by the Eeichsbank on the other 
elements of the money market. Her gold reserve is 
not large enough for the first expedient to be used 
lightly. Free payment in gold is sometimes, in 
effect, partially suspended,' 2 though covertly and with 

the highest sum paid in gold was 300 francs per head. T3ie other banks 
followed this example, and the most generous released 200 francs in gold. 
All special wishes for payment in money were charged 1 per cent premium. 
At the same time, deposits in gold were credited with 1 per cent premium " 
(see Bankers' Magazine, December 1912, p, 794). At the beginning of the 
month cashiers were charging a premium or commission of 6 f. per 1000 f. for 
payments in gold instead of silver (see Economist, November 9, 1912, p. 961). 

1 Although the Bank of France only holds an important quantity of 
foreign bills (generally sterling), on exceptional occasions, e.g. at the 
beginning and end of 1907 and at the end of 1909, foreign paper enters very 
largely, through the agency of the great Credit Banks, into the transactions 
of the French Money Market. These institutions take foreign bills into 
their own portfolios, and obtain the necessary funds by rediscounting 
inland bills at the Bank of France. Thus the French mechanism is much 
more closely analogous to the British than appears outwardly, and the 
influence of the Bank of France, like that of the Bank of England, is mainly 
indirect. The possibility of this is no doubt due to the fact that France, 
like Great Britain, is a creditor nation in the international short-loan market. 

2 For example, in November 1912 there was a premium of nearly | per 
cent on gold for export. 



shame. To an increasing extent the Reiclisbank 
depends on variations in her holding of foreign bills 
and credits. A few years ago such holdings were of 
small importance. The table given below shows with 
what rapidity the part taken by foreign bills and 
credits in the finance of the Reichsbank has been grow- 
ing. The authorities of the Reichsbank have now 
learnt that their position in the international short 
loan market is not one which permits them to fix the 
bank rate and then idly to await the course of events. 


Average for Year. 






















1 3 130,000 









1910 1 





i Since 1910 these figures have not been stated in the Reichsbank's annual reports. 


31st Dec. 

















7. If we pass from France, whose position as a 
creditor country is not altogether unlike Great 
Britain's, and from Germany, which is at any rate 
able to do a good deal towards righting the balance 
of immediate indebtedness by the sale of securities 
having an international market, to other countries of 
less financial strength, we find the dependence of 
their Central Banks on holdings of foreign bills and 
on foreign credits, their willingness to permit a 
premium on gold, and the inadequacy of their bank 
rates taken by themselves, to be increasingly marked. 
I will first mention very briefly one or two salient 
facts, and will then consider their underlying meaning, 
always with an ultimate view to their bearing on the 
affairs of India. 

8. To illustrate how rare a thing in Europe a 
perfect and automatic gold standard is, let us take 
the most recent occasion of stringency November 
1912. The Balkan War was at this time at an acute 
stage, but the European situation was only moderately 
anxious. Compared with the crisis at the end of 
1907, the financial position was one of comparative 
calm. Yet in the course of that month there was 
a premium on gold of about f per cent in France, 
Germany, Russia, Austria -Hungary, 1 and Belgium. 
So high a premium as this is as effective in retaining 
gold as a very considerable addition to the bank rate. 

1 This premium was made possible by the Austro- Hungarian Bank's 
exercising its right to refuse to exchange its bank notes for gold freely. 


If, for example, the premium did not last more 
than three months, it would add to the profits 
of a temporary deposit of funds for that period 
as much as an addition of 3 per cent to the discount 
rate ; or, to put it the other way round, there would 
need to be an additional profit of 3 per cent else- 
where if it were to be worth while to send funds 

9. The growing importance of foreign bills in the 
portfolios of the Eeichsbank has been shown above. 
The importance of foreign bills and credits in the 
policy of the Austro-Hungarian Bank is of longer 
standing and is better known. They always form 
an important part of its reserves, and the part first 
utilised in times of stringency. 1 It was supposed that 
in the third quarter of 1911 the Bank placed not less 
than 4,000,000 worth of gold bills at the disposal 
of the Austro-Hungarian market in order to support 
exchange. Amongst European countries, Eussia now 
keeps the largest aggregate of funds in foreign bills and 
in balances abroad amounting in November 1912 to 
.26,630,000. 2 Account being taken of their total re- 
sources, however, the banks of the three Scandinavian 
countries, Sweden, Norway, and Denmark, hold the 

1 In the abnormal conditions of recent times (1912-13), however, the 
Bank has not found it possible to maintain this part of its reserves at a 
high level. 

2 This does not include the funds held abroad on account of the Russian 
Treasury. Speaking in March 1913, in the Budget Committee of the Duma, 
the Minister of Finance stated that the total amount of Russian State funds 
placed abroad was 60,000,000. 


highest proportion in the form of balances abroad 
amounting in November 1912, for the three countries 
in the aggregate, to about 7,000,000. These are 
enough examples for my purpose. 

10. What is the underlying significance of this 
growing tendency on the part of European Sta.te 
Banks to hold a part of their reserves in foreign bills 
or foreign credits? We saw above that the bank- 
rate policy of the Bank of England is successful 
because by indirect means it causes the Money 
Market to reduce its short -period loans to foreign 
countries, and thus to turn the balance of immediate 
indebtedness in our favour. This indirect policy is 
less feasible in countries where the Money Market is 
already a borrower rather than a lender in the inter- 
national market. In such countries a rise in the bank 
rate cannot be relied on to produce the desired 
effect with due rapidity. A direct policy on the part 
of the Central Bank, therefore, must be employed. If 
the Money Market is not a lender in the international 
market, the Bank itself must be at pains to become 
to some extent one. The Bank of England lends to 
middlemen who, by holding bills or otherwise, lend 
abroad. A rise in the bank rate is equivalent to 
putting pressure on these middlemen to diminish their 
commitments. In countries where the Money Market 
is neither so highly developed nor, in relation to 
foreign countries, so self-supporting, the Central 
Bank, if it is to be secure, must take the matter 


in hand itself and, by itself entering the international 
money market as a lender at short notice, place itself 
in funds, at foreign centres, which can be rapidly 
withdrawn when they are required. The only 
alternative would be the holding of a much larger 
reserve of gold, the expense of which would be nearly 
intolerable. The new method combines safety with 

economv. Just as individuals have learnt that it is 


cheaper and not less safe to keep their ultimate 
reserves on deposit at their bankers than to keep them 
at home in cash, so the second stage of monetary 
evolution is now entered on, and nations are learning 
that some part of the cash reserves of their banks 
(we cannot go further than this at present) may be 
properly kept on deposit in the international money 
market. This is not the expedient of second-rate 
or impoverished countries ; it is the expedient of 
all those who have not attained a high degree of' 
financial supremacy of all those, in fact, who are 
not themselves international bankers. 

11. In the forty years, therefore, during which 
the world has been coming on to a gold standard 
(without, however, giving up for that reason its local 
currencies of notes or token silver), two devices 
apart from the bullion reserve itself and the bank 
rate have been evolved for protecting the local 
currencies. The first is to permit a small variation 
in the ratio of exchange between the local currency 
and gold, amounting perhaps to an occasional premium 


of f per cent on the latter ; this may help to tide 
over a stringency which is seasonal or of short dura- 
tion without raising to a dangerous level the rate 
of discount on purely local transactions. The second 
is for the Government or Central Bank to hold re- 
sources available abroad, which can be used for 
maintaining the gold parity of the local currency, 
when there is the need for it. 

12. We are now more nearly in a position to come 
back to the currency of India herself, and to see it in 
its proper relation to those of other countries. At 
one end of the scale we have Great Britain and 
France creditor nations in the short-loan market. 1 
In an intermediate position comes Germany a 
creditor in relation to many of her neighbours, but 
apt to be a debtor in relation to France, Great Britain, 
and the United States. Next come such countries as 
Russia and Austria-Hungary rich and powerful, with 
immense reserves of gold, but debtor nations, de- 
pendent in the short-loan market on their neighbours. 
From the currencies of these it is an easy step to 
those of the great trading nations of Asia India, 
Japan, and the Dutch East Indies. 

13. I say that from the currencies of such countries 
as Eussia and Austria-Hungary to those which have 

] I have throughout deliberately ignored the current practice of the 
United States in these matters. Her development and present position are 
anomalous, and have claimed no imitators. Her arrangements would need a 
discussion to themselves, and would, I think, convey few lessons of value to 
students of Indian affairs. In dealing with her dependencies, she has herself 
imitated, almost slavishly, India. 


explicitly and in name a Gold-Exchange Standard l it 
is an easy step. The Gold -Exchange Standard is 
simply a more regularised form of the same system 
as theirs. In their essential characteristics and in 
the monetary logic which underlies them the currencies 
of India and Austria-Hungary (to take these as our 
examples) are not really different. In India we know 
the extreme limits of fluctuation in the exchange 
value of the rupee ; we know the precise volume of 
reserves which the Government holds in gold and in 
credits abroad ; and we know at what moment the 
Government will step in and utilise these resources 
for the support of the rupee. In Austria-Hungary 
the system is less automatic, and the Bank is allowed 
a wide discretion. In detail, of course, there are a 
number of differences. India keeps a somewhat 
higher proportion of her reserves in foreign credits, 
and keeps some part of these credits in a less liquid 
form. She also keeps a portion of her gold reserve 
in London a practice made possible by the fact that 
for India London is not strictly a foreign centre. On 
the other hand, India is probably more willing than 
the Bank of Austria -Hungary to supply gold on 
demand. If we ^re to judge from the experience of 

1 I may seem to speak as if Japan had in name a Gold-Exchange Standard, 
which, is not the case. There is not much publicity in regard to her monetary 
arrangements. But I believe that they are, in fact, such that it is as a 
Gold - Exchange Standard hers ought impartially to be classified. The 
Finance Minister stated in the Diet in 1912 that the gold funds held by the 
Government and the Bank of Japan in Europe and the United States were 
about 37,000,000. The amount of gold circulating in Japan herself is, I 
believe, inconsiderable. 


recent years, India inclines to use her gold reserves, 
Austria-Hungary her foreign credits, first. But in 
the essentials of the Gold-Exchange Standard the 
use of a local currency mainly not of gold, some 
degree of unwillingness to supply gold locally in 
exchange for the local currency, but a high degree of 
willingness to sell foreign exchange for payment in 
local currency at a certain maximum rate, and to 
use foreign credits in order to do this the two 

countries agree. 

14. To say that the Gold-Exchange Standard 
merely carries somewhat further the currency arrange- 
ments which several European countries have evolved 
during the last quarter of a century is not, of course, 
to justify it. But if we see that the Gold-Exchange 
Standard is not, in the currency world of to-day, 
anomalous, and that it is in the main stream of 
currency evolution, we shall have a wider experience, 
on which to draw, in criticising it, and may be in a 
better position to judge of its details wisely. Much 
nonsense is talked about a gold standard's properly 
carrying a gold currency with it. If we mean by a 
gold currency a state of affairs in which gold is the 
principal or even, in the aggregate, a very important 
medium of exchange, no country in the world has 
such a thing. 1 Gold is an international, but not a 
local currency. The currency problem of each country 
is to ensure that they shall run no risk of being 

1 Unless it be Egypt. 


unable to put their hands on international currency 
when they need it, and to waste as small a proportion 
of their resources on holdings of actual gold as is 
compatible with this. The proper solution for each 
country must be governed by the nature of its position 
in the international money market and of its relations 
to the chief financial centres, and by those national 
customs in matters of currency which it may be 
unwise to disturb. It is as an attempt to solve this 
problem that the Gold-Exchange Standard ought to 
be judged. 

15. We have been concerned so far with transitional 
systems of currency. I will conclude this chapter 
with a brief history in outline of the Gold-Exchange 
Standard itself. It will then be time to pass from 
high generalities to the actual details of the Indian 

The Gold-Exchange Standard arises out of the dis- 
covery that, so long as gold is available for payments 
of international indebtedness at an approximately 
constant rate in terms of the national currency, it 
is a matter of comparative indifference whether it 
actually forms the national currency. 

The Gold-Exchange Standard may be said to exist 
when gold does not circulate in a country to an 
appreciable extent, when the local currency is not 
necessarily redeemable in gold, but when the Govern- 
ment or Central Bank makes arrangements for the 
provision of foreign remittances in gold at a fixed 


maximum rate in terms of the local currency, the 
reserves necessary to provide these remittances being 
kept to a considerable extent abroad. 

A system closely resembling the Gold-Exchange 
Standard was actually employed during the second 
half of the eighteenth century for regulating the 
exchange between London and Edinburgh. Its 
theoretical advantages were first set forth by Bicardo 
at the time of the Bullionist Controversy. He laid it 
down that a currency is in its most perfect state when 
it consists of a cheap material, but having an equal 
value with the gold it professes to represent ; and he 
suggested that convertibility for the purposes of the 
foreign exchanges should be ensured by the tendering 
on demand of gold bars (not coin) in exchange for 
notes, so that gold might be available for purposes of 
export only, and would be prevented from entering 
into the internal circulation of the country. In an 
article contributed to the Contemporary Review of 
1887, Dr. Marshall again brought these advantages 
to the notice of practical men. 

16. The first crude attempt in recent times at 
establishing a standard of this type was made by 
Holland. The free coinage of silver was suspended in 
1877. But the currency continued to consist mainly 
of silver and paper. It has been maintained since 
that date at a constant value in terms of gold by the 
Bank's regularly providing gold when it is required 
for export and by its using its authority at the same 


time for restricting so far as possible the use of gold 
at home. To make this policy possible, the Bank of 
Holland has kept a reserve, of a moderate and 
economical amount, partly in gold, partly in foreign 
bills. 1 During the long period for which this policy 
has been pursued, it has been severely tried more 
than once, but has stood the test successfully. 

It must be noticed, however, that although Holland 
has kept gold and foreign bills as a means of obtaining 
a credit abroad at any moment, she has not kept a 
standing credit in any foreign financial centre. The 
method of keeping a token currency at a fixed par 
with gold by means of credit abroad was first adopted 
by Count Witte for Russia in the transitional period 
from inconvertible paper to a gold standard ; in the 
autumn of 1892 the Department of Finance offered 
to buy exchange on Berlin at 218 marks and to 
sell at 2*20. In the same year (1892) the Austro 
Hungarian system, referred to above, was established. 
As in India their exchange policy was evolved 
gradually. The present arrangements, which date 

1 In the course of the last twenty years, however, the Bank of Holland, 
having got rid of the greater part of her redundant stock of silver coins, has 
gradually come to rely more on her holding of gold and less on her holding 
of foreign bills than formerly. In 1892-93 foreign bills at 1,801,409 were 
about 16 per cent of her resources (excluding silver coin) ; in 1911-12 they had 
fallen to 1, 389,139 or about 5*5 per cent of her resources (excluding silver coin). 
But the media of exchange are still notes and silver, and not less than formerly 
does the Bank pursue the policy of keeping her gold for purposes of export 
only and of withholding it from circulation. Almost the whole of her stock 
of gold is in the form of bars and foreign coin. (It should be added, however, 
that at the end of 1912 there were proposals, in order to avoid fresh coinage 
of silver, for the introduction of a 5 fl. gold piece.) 


from 1896, were made possible by the strong 
preference of the public for notes over gold and by 
the provision of the law which permitted the holding 
of foreign bills as cover for the note issue. This 
exchange policy is the easier, because the Austro- 
Hungarian Bank is by far the largest dealer in 
exchange in Vienna \ just as the policy of the 
Government of India is facilitated by the commanding 
influence which the system of Council Bills gives it 
over the exchange market. 

17. But although India was not the first country 
to lead the way to a Gold-Exchange Standard, she 
was the first to adopt it in a complete form. When 
in 1893, on the recommendation of the Herschell 
Committee, following upon the agitation of the Indian 
Currency Association, the Mints were closed to the 
free coinage of silver, it was believed that the 
cessation of coinage and the refusal of the Secretary 
of State to sell his bills below Is. 4d. would suffice 
to establish this ratio of exchange. The Government 
had not then the experience which we have now ; we 
now know that such measures are not by themselves 
sufficient, except under the influence of favouring 
circumstances. As a matter of fact the circum- 
stances were, at first, unfavourable. Exchange fell 
considerably below Is. 4d., and the Secretary of State 
had to sell his bills for what he could get. If there 
had been, at the existing level of prices, a rapidly 
expanding demand for currency at the time when the 


Mints were closed, the measures actually taken might 
very well have proved immediately successful. But 
the demand did not expand, and the very large issues 
of currency immediately before and just after the 
closure of the Mints proved sufficient to satisfy the 
demand for several years to come; just as a de- 
mand for new currency on an abnormally high scale 
from 1903 to 1907, accompanied by high rates of dis- 
count, was followed in 1908 by a complete cessation of 
demand and a period of comparatively low rates of 
discount. Favourable circumstances, however, came 
at last, and by January 1898 exchange was stable at 
Is. 4d. The Fowler Committee, then appointed, 
recommended a gold currency as the ultimate ob- 
jective. It is since that time that the Government 
of India have adopted, or drifted into, their present 

18. The Gold-Exchange Standard in the form in 
which it has been adopted in India is justly known as 
the Lindsay scheme. It was proposed and advocated 
from the earliest discussions, when the Indian currency 
problem first became prominent, by Mr. A. M. Lindsay, 
Deputy-Secretary of the Bank of Bengal, who always 
maintained that " they must adopt my scheme despite 
themselves." His first proposals were made in 1876 
and 1878. They were repeated in 1885 and again 
in 1892, when he published a pamphlet entitled 
Ricardo's Exchange Remedy. Finally, he explained 
his views in detail to the Committee of 1898. 


Lindsay's scheme was severely criticised both by 
Government officials and leading financiers. Lord 
Farrer described it as " far too clever for the ordinary 
English mind with its ineradicable prejudice for an 
immediately tangible gold backing to all currencies." 
Lord Rothschild, Sir John Lubbock (Lord Avebury), 
Sir Samuel Montagu (the late Lord Swaythling) all 
gave evidence before the Committee that any system 
without a visible gold currency would be looked on 
with distrust. Mr. Alfred de Rothschild went so far 
as to say that "in fact a gold standard without a 
gold currency seemed to him an utter impossibility." 
Financiers of this type will not admit the feasibility 
of anything until it has been demonstrated to them 
by practical experience. It follows, therefore, that 
they will seldom give their support to what is new. 

19. Since the Indian system has been perfected 
and its provisions generally known, it has been widely 
imitated both in Asia and elsewhere. In 1903 the 
Government of the United States introduced a system 
avowedly based on it into the Philippines. Since 
that time it has been established, under the influence 
of the same Government, in Mexico and Panama. 
The Government of Siam have adopted it The 
French have introduced it in Indo-China. Our own 
Colonial Office have introduced it in the Straits 
Settlements and are about to introduce it into the 
West African Colonies. Something similar has existed 
in Java under Dutch influences for many years. The 


Japanese system is virtually the same in practice. In 
China, as is well known, currency reform has not yet 
been carried through. The Gold-Exchange Standard 
is the only possible means of bringing China on 
to a gold basis, and the alternative policy (the policy 
of our own Foreign Office) is to be content at first 
with a standard, as well as a currency, of silver. A 
powerful body of opinion, led by the United States, 
favours the immediate introduction of a gold standard 
on the Indian model. 

It may fairly be said, therefore, that in the last 
ten years the Gold-Exchange Standard has become 
the prevailing monetary system of Asia. I have tried 
to show that it is also closely related to the prevailing 
tendencies in Europe. Speaking as a theorist, I 
believe that it contains one essential element the use 
of a cheap local currency artificially maintained at par 
with the international currency or standard of value 
(whatever that may ultimately turn out to be) in 
the ideal currency of the future. But it is now time 
to turn to details. 



1. THE chief characteristics of the Indian system 
of currency have been roughly sketched in the first 
chapter. I will now proceed to a description of the 
system of note issue. 

2. In existing conditions the rupee, being a token 
coin, is virtually a note printed on silver. The 
custom and convenience of the people justify this, so 
far as concerns payment in small sums. But in 
itself it is extravagant. When rupees are issued, the 
Government, instead of being able to place to reserve 
the whole nominal value of the coin, is able to retain 
only the difference between the nominal value and 
the cost of the silver. 1 For large payments, there- 
fore, it is important to encourage the use of notes 
to the utmost extent possible, from the point of view 
of economy, because by these means the Government 
may obtain a large part of the reserves necessary for 

1 The rupee contains oz. of silver of eleven-twelfths fineness. When 
standard silver is at 24d. per oz. the cost of a rupee to the Government is 
about 9'181d. ; at 32d. per 02, it is about 12-2411 The average rate of 
profit on coinage of rupees from 1910 to May 1912 was about 42% of the 
nominal value. 



the support of a Gold-Exchange Standard, and also 
because only thus will it be possible to introduce a 
proper degree of elasticity in the seasonal supply of 

3. By Acts of 1839-43 the Presidency Banks of 
Bengal, Bombay, and Madras were authorised to issue 
notes payable on demand ; but the use of the notes 
was practically limited to the three Presidency towns. 1 
These Acts were repealed in 1861, when the present 
Government Paper Currency was first instituted. 
Since that time no banks have been allowed to issue 
notes in India. 

Proposals for a Government Paper Currency were 
instituted in 1859 by Mr. James Wilson on his going 
out to India as the first Financial Member. 2 Mr. 
Wilson died before his scheme could be carried into 
effect, and the Act setting up the Paper Currency 
scheme, which became law in 1861, differed in some 
important respects from his original proposals. 3 The 
system was eventually set up under the influence of 
the very rigid ideas as to the proper regulation of 
note issue prevailing, as a result of the controversies 
which had culminated in the British Bank Act of 1844, 
amongst English economists of that time. Accord- 
ing to these ideas, the proper principles of note issue 

1 See also pp. 199, 200. 

2 For this and other historical details see J. B. Brunyate, An Account of 
the Presidency JBanJcs. 

8 Mr. Wilson had proposed to invest a high proportion of the reserve 
(perhaps two-thirds) in Government securities. 


were two first, that the function of note issue 
should be entirely dissociated from that of banking ; 
and second, that "the amount of notes issued 
on Government securities should be maintained at 
a fixed sum, within the limit of the smallest 
amount which experience has proved to be neces- 
sary for the monetary transactions of the country, 
and that any further amount of notes should be 
issued on coin or bullion." l These principles 
were orthodox and all others "unsound." "The 
sound principle for regulating the issue of a Paper 
Circulation," wrote the Secretary of State, "is that 
which was enforced on the Bank of England by 
the Act of 1844" In England, of course, bankers 
immediately set themselves to recover the economy 
and elasticity, which the Act of 1844 banished from 
the English system, by other means ; and with the 
development of the cheque system to its present 
state of perfection they have magnificently succeeded. 
In foreign countries all kinds of new principles have 
b,een tried for the regulation of note issue, and some 
of them have been very successful. In India the 
creed of 1861 is still repeated; but by unforeseen 
chance the words have changed their meanings, and 
have permitted the old system to acquire through 
inadvertence a certain degree of usefulness. The 
coin, in which the greater part of the reserve had to 

1 I quote this from the Secretary of State's despatch (Sir Charles Wood, 
March 26, 1860) criticising Mr. Wilson's original scheme. 


be held, was, of course, the rupee. In 1861 this was 
a freely minted coin worth no more than its bullion 
value. When the rupee became an artificially valued 
token, rupees tacitly remained the legitimate form 
of the reserve (although after a time sovereigns 
were added as an optional alternative). Thus the 
authorities are free, if they like, to hold the whole 
of the Currency Reserve in rupee -tokens, and this 
reserve has become, therefore (as we shall see below), 
an important part of the mechanism by which the 
supply of silver rupees to the currency is duly 
regulated. While, however, the note issue has 
managed to evolve an important function for itself, 
I think the time has come when the usefulness of 
the Currency Eeserve may be much increased by a 
deliberate consideration of the place it might fill in 
the organism of the Indian Money Market. I return 
to this later in the chapter. In the meantime I pass 
to a description of the Paper Currency as it now is 
insisting, however, that when we come to consider 
how it may be improved, the circumstances of its 
origin be not forgotten. 

4. For the first forty years of their existence the 
G-overnment notes, though always of growing import- 
ance, took a very minor place in the currency system 
of the country. This was partly due to an arrange- 
ment, now in gradual course of abolition, by which for 
the purposes of paper currency India has been divided 
up in effect into several separate countries. These 


' circles/ as they are called, now seven 1 in number, 
correspond roughly to the principal provinces of 
India, the offices of issue being as follows : 

Calcutta for Bengal, Eastern Bengal, and Assam. 

Cawnpore the United Provinces. 

Lahore the Punjab and North -West Frontier 


Madras the Madras Presidency and Coorg. 
Bombay Bombay and the Central Provinces. 
Karachi Sind. 
Rangoon Burma. 

The currency notes 2 are in the form of promissory 
notes of the Government of India payable to the 
bearer on demand, and are of the denominations Es. 5, 
10, 50 ; 100, 500, 1000, and 10,000. Thus the lowest 
note is of the face value of 6s. 8d. They are issued with- 
out limit from any Paper Currency office in exchange 
for rupees or British gold coin, or (on the requisition 
of the Comptroller-General) for gold bullion. 3 

5. Up to 1910 the following arrangements were 
in force. 

Every note was legal tender in its own circle. 
Payment of dues to the Government could be made 
in the currency notes of any circle ; and railway 
companies could, if they accepted notes of any circle 

1 A rearrangement was made in 1910 ; previous to that date there were 
four circles and four sub-circles. It is no longer worth while to explain the 
relations which used to exist between the circles and sub-circles. 

2 For the legal provisions outlined in the following paragraphs see 
Statistics of British India, part iv. (a). 

3 For some further details see p. 9. 


in payment of fares and freight, recover the value 
of them from the Government. 

But, until recently, no notes were legal tender 
outside their own circle, and were payable only at 
the offices of issue of the town from which they were 
originally issued. 

Beyond this the law imposed no obligation to pay. 
For the accommodation of the public, however, notes 
of other circles could be cashed at any Paper 
Currency office to such extent as the convenience of 
each office might permit. In ordinary circumstances 
every Government treasury, of which there are about 
250, has cashed or exchanged notes if it could do so 
without inconvenience; and when this could not 
be done conveniently for large sums, small sums 
have generally been exchanged for travellers. 

6. It is easy to understand the reasons for these 
restrictions. India is an enormously large country, 
over which the conditions of trade lead coins to ebb 
and flow within each year. At the beginning of the 
busy season when the autumn crops are harvested, 
rupees flow in great volume from the Presidency 
towns up country ; in early spring they are carried 
to Burma for the rice crop; and so on slowly 
finding their way back again to the Presidency towns 
during the summer. If the Government had made 
its notes encashable at a great variety of centres, it 
would have been taking on itself the expense and 
responsibility of carrying out these movements of 


coin at different seasons of the year. When a 
country is habituated to the use of notes for making 
payments, they can be very usefully employed for 
purposes of remittance also. But a note-issuing 
authority puts itself in a difficulty if it provides 
facilities for remittance before a general habit has 
grown up of using notes for other purposes. If, on 
the other hand, the notes had been made universal 
legal tender, but only encash able at Presidency towns, 
there would undoubtedly have been a premium on 
coin at certain times of the year. And this would 
have greatly hindered the growth of the notes 7 

The Government, therefore, did what it could to 
make the notes useful and popular for purposes other 
than those of remittance ; and it facilitated remittance 
so far as the proceeds of taxation, accumulating in its 
treasuries, permitted it to do this without expense. 
But it shrank from taking upon itself further 
responsibility. Its practice may be compared with 
that of the branches of the Eeichsbank. 

.On the other hand, the objections to a policy, 
which divided the country up for the purposes of 
paper currency, are also plain. The limitation of the 
areas of legal tender and of the offices where the notes 
were encashable on demand greatly restricted the 
popularity of the notes. It might well have seemed 
worth while to popularise them, even at the expense 
of temporary loss. As soon as the public had become 


satisfied that the notes could be turned into coin 
readily and without question, their desire to cash 
them would probably have been greatly diminished. 
It is not certain that Government would haf e lost in 
the long-run if it had undertaken the responsibility 
and expense of regulating the flow of coin to the 
districts where it might be wanted at the different 
seasons of the year. 

7. After the establishment of the Gold-Exchange 
Standard the importance of enlarging the functions 
of the note issue became apparent; and since 1900 
the question of increasing the availability of the 
notes has been constantly to the front. In 1900 
the Government issued a circular asking for opinions 
on certain proposals, including one for " universalis- 
ing" the notes or making them legal tender in all 
circles. Some authorities thought that notes of 
small denominations (Rs. 5 and Rs. 10) might be 
safely universalised, without risk (on account of the 
trouble involved) of their being used for remittance on 
a large scale. It is on these lines that the use of the 
notes has been developed. In 1903 five-rupee notes 
were universalised except in Burma that is to say, 
five-rupee notes of any circle were legal tender and 
encashable at any office of issue outside Burma ; and 
in 1909 the Burmese limitation was removed. 

In 1910 a great step forward was taken, and the 
law on the subject was consolidated by a new Act 
Notes of Rs. 10 and Rs. 50 were universalised; and 


power was taken to universalise notes of higher 
denominations by executive order. In pursuance of 
this authority notes of Rs. 100 were universalised in 
1911. " At the same time the receipt of notes of the 
higher denominations in circles other than the circle 
of issue, in payment of Government dues and in 
payments to railways, post and telegraph offices, was 
stopped by executive orders " ; and " with a view 
to minimise any tendency to make use of the new 
universal notes for remittance purposes/ it was 
decided concurrently with the new Act to offer 
facilities to bankers and merchants to make trade 
remittances between the currency centres by means 
of telegraphic orders granted by Government at a 
reduced rate of premium." 1 In the following year 
the Comptroller of Paper Currency reported that no 
difficulty whatever was experienced as the result of 
universalising the Es. 10 and Es. 50 notes; and the 
inconveniences, the fear of which had retarded the 
development of the note system for many years, were 
not realised. 

8. The effect of these successive changes has been 
to make the old system of circles virtually inoperative. 
With notes of Es. 100 universal legal tender it is 
difficult to see what can prevent the public from 
using them for purposes of remittance if they should 
wish to do so. The "circles" can no longer serve 
any useful purpose, and it would help to make clear 

1 Report of Comptroller of Paper Currency, 1910. 


in the public mind the nature of the Indian note 
issue if they were to be abolished in name as well 
as in effect 

9. There must have been many occasions under 
the old system, on which ignorant persons suffered 
inconvenience through having notes of foreign circles 
passed off on them ; and a long time may pass before 
distrust of the notes, as things not readily convertible, 
bred out of the memories of these occasions, entirely 
disappears. But, in combination with other circum- 
stances, the universalising of the notes has had 
already a striking effect on the volume of their 
circulation, as is shown in the figures given below. 
It should be explained that by gross circulation (in 
the Government Statistics) is meant the value of all 
notes that have been issued and not yet paid off; 
that the net circulation is this sum less the value of 
notes held by Government in its own treasuries ; and 
that the active circulation is the net reduced by the 
value of notes held by the Presidency banks at their 
head offices. 1 For some purposes the active circula- 
tion is the most important. But it is the reserve of 
rupees held against the gross circulation which is the 
best indication of the surplus volume of coined silver 
available, if necessary, for the purposes of circulation. 

The following table gives for various years the 

1 Before 1893 these terms were used with a different significance. The 
statistics are still a little ambiguous as to whether for the net circulation 
the notes in Government reserve treasuries or the notes in all Government 
treasuries are to be deducted. I use the term in the latter sense. 



average of the circulation on the last day of each 
month : 

(In lakhs of rupees.) 

(In million at Is. 4d. 
the rupee throughout.) 





























22 J. 







































The following table gives in million the gross 
circulation of currency notes on March 31 of each 
year : 


. 19 
. 21 
. 35} 
. 30 



, 36| 
. 36i 

. 46 

The following table gives the average monthly 
gross circulation in million (at Is. 4d. the rupee 
throughout) : ' 

Five years ending 1880-1881 







The year 1911-1912 

. 8* 


. 11* 
19 - 

. 24 

. 32 
. 38 


10. The rules governing the reserves which must 
be held against currency notes are very simple. A 
certain fixed maximum, the amount of which is 
determined from time to time by law, may be held 
invested, chiefly in Government of India rupee 
securities. Up to 1890 the invested portion of the 
reserve amounted to 600 lakhs (Es. 600,00,000). 
This was increased to 700 lakhs in 1891, to 800 lakhs 
in 1892, to 1000 lakhs in 1897; to 1200 lakhs, of 
which 200 lakhs might be in English Government 
securities, in 1905 ; and to 1400 lakhs (9,333,000), 
of which 400 lakhs (2,666,000) might be in English 
securities, in 1911. The interest thus accruing on 
the invested portion of the reserve, less the expenses 
of the Paper Currency Department, is credited to the 
general revenues of the Government under the head 
" Profits of Note Circulation." This interest now 
amounts to 300,000 annually. 

Up to 1898 the whole of the rest was held in 
silver coin in India. Under the Gold Note Act of 
1898 the Government of India obtained authority 
to hold any part of the metallic portion of the reserve 
in gold coin. An Act of 1900 gave authority to hold 
part of this gold in London; but this power was 
only intended to be used for purposes of temporary 
convenience, and, although some gold was held in 
London in 1899 and 1900, this was not part of a 
permanent policy. An Act of 1905, however, gave 
full power to the Government to hold the metallic 




portion of the reserve, or any part of it, at its free 
discretion, either in London or in India, or partly 
in both places, and also in gold coin or bullion, or 
in rupees or silver bullion, subject only to the 
exception that all coined rupees should be kept 
in India and not in London. The actual figures, 
showing where the gold reserve has been held at 
certain dates, are given below. 


March 31. 

In India. 

In London. 



















6 - 




















































Rupees .... 11,000,000 

Gold in India . . . 19,500,000 

Gold in London . . . 6,000,000 

Securities . . . 9,500,000 



11. Gold was originally accumulated in the reserve 
in India through the automatic working of the rule 
by which rupees could be obtained in exchange for 
sovereigns. After exchange touched par in 1898, 
we see from the above table that gold began to 
flow in. When in 1900 the accumulations reached 
5,000,000, attempts were made, in accordance with 
the recommendations of the Fowler Committee, to 
force it into circulation. 1 After the comparative 
failure of this attempt, and the passing of the 
Act of 1905, as described above, the Paper Currency 
Chest in England was instituted, and by 1906 about 
two-thirds of the gold which had been accumulated 
up to that time was transferred to this fund. This 
stock is kept at the Bank of England, but is not in- 
cluded in the Bank of England's own reserve. Gold 
which is thus transferred is said to be " ear-marked. " 
The fund is under the absolute control of the 
Secretary of State for India in Council, and trans- 
ferences to it are, so far as the accounts of the Bank 
of England are concerned, reckoned . as exports. 
Policy as to how much of the gold should be kept 
in London and how much in India has fluctuated 
from time to time. I shall discuss it in Chapter VI. 

12. These are the chief relevant facts of law. 
Important considerations of policy do not lie so 
plainly on the surface. Since 1899 the circulation 
of notes has more than doubled, but the invested 

1 For an account of this see p. 73. 


portion of the reserve has been increased by only 
40 per cent. As the note issue has become more 
firmly established and more widely used, a growing 
and not a diminishing proportion of the reserves has 
been kept in liquid form. This is due to a deliberate 
change of policy, and to the use of the liquid part of 
the reserve for a new purpose. The bullion reserve 
is no longer held solely with the object of securing the 
ability to meet the obligation to cash notes in legal 
tender (rupees or gold) on demand. It is now utilised 
for holding gold by means of which the Secretary of 
State can support exchange in times of depression and 
maintain at par the gold value of the rupee. For the 
sake of this object the Government are content to 
forego the extra profit which might be gained by in- 
creasing the investments, and have steadily increased 
instead (as shown in the table on p. 49) the gold 
portion of the reserve. The Paper Currency Reserve 
is thus used to provide the gold which is the first line 
of defence of the currency system as a whole, and 
hence can hardly be distinguished from the resources 
of the Gold Standard Reserve proper. 

It is not profitable to discuss the reserve policy 
of the Paper Currency under existing conditions in 
isolation from the other reserves which the Govern- 
ment now hold. The whole problem of the reserves, 
regarded as a current practical question, is dealt 
with in Chapter VI. In this chapter I wish to 
look at the matter from a broad standpoint, with 


an eye to the proper policy in a future, possibly 


13. The present policy was designed in its main 
outlines at a time when notes formed an insignificant 
part of the country's currency, and when the system 
of circles still greatly restricted their usefulness. 
The notes were at first, and were intended to be, 
little more than silver certificates. The rules govern- 
ing the Eeserve were framed (see 3) at a time 
which, to the modern student of currency, is almost 
prehistoric, under the influence of the Bank of 
England's system of note issue and of the British 
Bank Act, an Act which had the effect of destroy- 
ing the importance of notes as a form of currency in 
England, and which it has been found impossible, in 
spite of some attempts, to imitate in the note-using 
countries of Europe. As has been urged in 
Chapter II, England is in matters of currency the 
worst possible model for India; for in no country 
are the conditions so wholly different. A good deal 
of experience with regard to note issues has now 
been accumulated elsewhere which ought some day 
to prove useful to India if her English rulers can 
sufficiently free themselves from their English 
traditions and preconceptions. Let me first give a 
short account of the nature of the seasonal demand 
for money in India; and then discuss the salient 
respects in which her system of note issue differs 
from those of typical note-using countries. 


14. In contrast to what happens in the case of 
most note systems, the gross circulation in India 
diminishes instead of increasing during the busy 
seasons of autumn and spring. This is due to the 
fact that the Government Treasuries, the Presidency 
Banks, and possibly other banks and large merchants, 
use the notes as a convenient method of avoiding the 
custody of large quantities of silver during the slack 
season when rupees are not wanted. 1 That is to say, 
they deposit their surplus rupees during the summer 
in the Currency Eeserve, holding their own reserves 
in the form of notes ; and when the drain of rupees 
begins up country for moving the crops these notes 
have to be cashed. Thus in the dull season currency 
is largely in the hands of a class of persons and 
institutions which finds it most convenient to hold 
it in the form of notes, and in the busy season it is 
dissipated through the country and is, temporarily, 
in the hands of smaller men cultivators who have 
sold their crops, small moneylenders and others, who 
habitually deal in small sums for which the rupee is 
the most convenient unit, or who do not yet under- 
stand the use of notes and still prefer, therefore, to 
be paid in actual coin. 

15. Notes themselves, however, are used also, and 
to an increasing extent, for moving crops; and, 

1 At all times the vast bulk of the funds held by the Presidency Banks 
at their Head Offices are kept in notes, chiefly of high denominations 
(Rs. 1000 and Rs. 10,000) ; e.g. on December 31, 1911, 4,200,000 out of 
4,800,000 was thus held. 




although the gross circulation falls during the busy 
season for the reasons just given, the active circulation 
(i.e., excluding the holdings of the Government 
Treasuries and the Presidency Banks) does, as we 
should expect, increase at this time of year. "When, 
therefore, we are considering what proportion of 
liquid reserves ought to be maintained, or what part 
the note issue plays in supplying the much needed 
element of elasticity in the busy season, it is of the 
active rather than of the gross circulation that we 
must take account. The figures are given below in 
lakhs of rupees : 

Months of 
and, Maxi- 
mum active 


1907-1908. 1 



















July . 
August . 

January . 
March . 





























Columns (1) : Active circulation. Columns (2) : Holdings of Treasuries and Presidency 
Banks, i.e., excess of gross over active circulation. 

1 An abnormal year. 

We see, therefore, that, while the notes held by 
the Presidency Banks and the Treasury fall in the 
busy season by 700 to 1000 lakhs below their highest 
figure in the slack season, the active circulation 
increases in the busy season over its lowest figure in 
the slack season by about 400 lakhs (in the latest year 
for which we have figures, 1911-1912, by more than 



600 lakhs). Of course this is not a very high pro- 
portion of the total increase in the volume of currency 
which is required in the busy season. But it is an 
amount well worth considering, and these figures put 
the note issue in a more favourable light as a source 
of currency in the busy season than is usually realised, 
The relative importance of notes and rupees 1 in 
supplying the seasonal needs of trade is well shown in 
the following table : 


April to June. 

July to Sept. 

Oct. to Dec. 

Jan, to March. 

Whole Year. 













+ 83 

+ 339 

+ 58 

+ 1139 

+ 175 

+ 88 

+ 101 

+ 1450 

+ 417 


- 24 


+ 600 

+ 220 

+ 1068 

+ 310 

+ 156 

+ 1800 

+ 382 


+ 182 


+ 145 

+ 29 

+ 735 




+ 392 






+ 198 

+ 339 

+ 112 


+ 72 


+ 234 


+ 47 

- 76 

- 58 

+ 286 

+ 1065 

+ 130 

+ 268 

+ 163 

+ 1322 

+ 503 





+ H7 

+ 722 

+ 144 

- 1 

+ 68 

+ 334 

+ 19 




+ 220 

+ 262 

+ 499 

+ 356 

+ 565 

- 1 

+ 1154 

+ 444 

1 In this table rupees (but not notes) in the Presidency Banks are treated as being in 
circulation. It would be a troublesome piece of work to exclude them, and would make, 
I think, very little difference to the result. The main variable element in the reserves of 
the Presidency Banks is the notes, and these are duly allowed for in the above table. 

The above table is exceedingly instructive. It 
shows that the notes supply an increasingly important 
proportion of the seasonal demand for additional 
currency. It shows also that the demand for notes 
from one year to another has been of a steadier 
character than the demand for rupees. In the period 

1 The part played by gold is discussed in Chapter IT. 


of depression from the winter of 1907 until the 
autumn of 1908 the active rupee circulation was 
much harder hit than the active note circulation ; for 
in the six months January to June 1908 the rupee 
circulation fell by 1468 lakhs, while the active note 
circulation fell by 294 lakhs, and for the nine months 
January to September 1908 the former fell by 2186 
lakhs, while the latter fell by only 96 lakhs. 1 

1 6. Let me now turn to three salient characteristics, 
all closely connected with one another, and chiefly 
distinguishing the Indian system of paper currency 
from those of most note-using countries. 

In the first place, the function of note-issue is wholly 
dissociated in India from the function of banking. 
To discount bills is one of the functions of banks. 
Where there are Central Banks with the right of 
note issue, they are usually able, subject to various 
restrictions, to increase 'their note issue at certain 
seasons of the year in order to discount more bills. 

In the second place, as there is no Central Bank 
in India, there is no Government Banker. It is true 
that the Government keep some funds (rather more 
than 2,000,000, as a rule) at the three Presidency 
Banks. But the bulk of their floating resources is 
held either in London or in cash in their own Treasuries 
in India. Thus, as in the United States, the Govern- 
ment maintains an independent Treasury system. This 

1 I estimate that at this date the total volume of the active rupee circula- 
tion was between five and six times the total volume of the active note 


means, just as it does in the United States, that, at 
certain seasons of the year when taxes are flowing in 
fastest, funds may sometimes be withdrawn from the 
money market. The difficulty and inconvenience to 
which this system has given rise in the United States 
are well known to those who are acquainted with the 
recent financial history of that country. The ill 
effects of it are to a certain extent counteracted, in 
the case of India, by a transference of these funds to 
London and a release of the accumulating currency 
in India through the sale of Council Bills. But this 
is not a perfect solution. 

The third and most important point arises out of 
the first two. The Indian currency is internally 
(i.e., apart from the import of funds from foreign 
countries) absolutely inelastic. There is no method 
whatever by which the volume of currency can be 
temporarily expanded by some credit device within 
the country to meet the regularly recurrent seasonal 
demands of trade. Cheque-using countries meet the 
difficulty by increasing the volume of credit created 
by the banks ; most note -using countries meet it 
by the Central Bank's discounting a greater volume 
of home bills than .usual, and thus increasing its 
note circulation temporarily, without a correspond- 
ing increase in its metallic reserves. Except for a 
certain proportion of the business which is trans- 
acted by cheque (chiefly in the Presidency towns), 
there is nothing corresponding to this in India. 


Additional currency, whether notes or rupees, can 
be obtained in two ways only by buying Council 
Bills in London or by bringing in sovereigns. 
Additional notes or rupees can be obtained in pay- 
ment of Council Bills or in exchange for sovereigns, 
but not otherwise. The fact that a temporary 
increase in the media of exchange can only be 
obtained by bringing in funds from abroad partly 
explains the high rate of discount in India during 
the busy season. This question will be more fully 
dealt with in Chapter VIII. But the main point 
can be put briefly thus : If funds are to be attracted 
from abroad for a short period (say three months), 
the rate of interest must be high enough to repay the 
cost of remittance both ways, which in the case of 
places so remote from one another as India and 
London is considerable. If there were some authority 
which could create credit money in India during the 
busy season, it would not be necessary for the rate of 
discount to rise so high. 

17. The objections to the existing arrangements 
largely arise,* therefore, out of the absence of a 
State Bank This question is further discussed 
in Chapters VI. and VII. I feel little doubt that 
India ought to have a State Bank, associated in a 
greater or less degree with the Government. The 
Government is drifting year by year into doing more 
business of an essentially banking character ; and as 
time goes on it will become increasingly objectionable 


to dissociate some of the functions of modern State 
Banking from others. But there is a considerable 
weight of opinion in favour of the view that the 
time for the establishment of a Central Indian Bank 
is not yet ripe. In the meantime is any partial 
remedy possible for the evils dealt with above ? 

18. I am inclined to think that such a remedy is 
possible. The manner in which the reserve against 
the note issue must be kept is needlessly restricted. 
Apart from that portion which is permanently 
invested, the whole must be kept in gold and silver. 
This is in imitation of the rules governing the Bank 
of England's note -issue. But the note -issuing 
banks of Europe afford a better model. It might be 
proper to prescribe by law the holding of a certain 
proportion of the reserve (say one-third 1 ) in gold 
or silver coin. A further amount might be held, as 
at present, permanently invested in Government 
of India securities. With regard to the rest the 
Government should, I think, permit itself much greater 
latitude. It should be free to lend it out on suitable 
security, either in India or London, for periods not 
exceeding three months. In London it should be 
lent out on the same conditions as the Cash Balances 
and the Gold-Exchange Standard (see Chapter VI.) are 
lent out at present To lend in London would be 
technically convenient (for the reasons given on 

1 The proper proportion would partly depend upon the policy pursued in 
regard to the Gold Standard Reserve. 


p. 172), but it would not cure the inelasticity of the 
Indian system. Part of the reserve should, therefore, 
be lent out in India. Suitable security for this purpose 
would be Government of India securities (which would 
have indirectly the effect of increasing the market for 
Eupee Paper) and Bills of Exchange of the highest class. 
It is not worth while to discuss here in detail the precise 
methods which it would be proper for the Government 
to adopt in lending out funds in India either from the 
Cash Balances or from the Paper Currency Beserve. 
Whether it were done through the Presidency Banks 
only, or whether an approved list of borrowers of 
Government funds were to be drawn up for India as 
is already the case for London, the effect on the 
Indian Money Market would be much the same. 
The needed element of elasticity would be obtained, 
and the present absolute dependence of India on 
London for an expansion of currency would be 
modified. I shall return to this proposal again in 
Chapters VI. and VIII. Its full force cannot be shown 
until we have discussed the question of the Secretary 
of State's reserves as a whole, and have studied in 
detail the movements of the Indian bank rate. 

A good deal of opinion has been expressed in 
India lately in favour of loans being made there 
from the Government's Cash Balances. In so far as 
this opinion demands some new machinery by which 
on suitable occasions the Government can lend out 
funds in India herself, the evil which it seeks to 


remedy is a real one. And the method proposed 
above is, I believe, the right way in which to 
approach the problem's solution. 

1 9. The discussion of this question will be concluded 
in Chapters VI, YIL, and VIII. But it will be well 
to say a few words at once with a view to avoiding 
misunderstandings on two points. It has been 
necessary in the immediate past to use the Paper 
Currency Reserve as a part of the general reserves held 
for ensuring the absolute stability of the rupee. I do 
not advocate the lending out in India of any part of 
this reserve, or of the Cash Balances, at the expense 
of the stability of the Gold Standard, or until adequate 
measures can be taken in other ways to ensure this. 
But I think the time has practically arrived when the 
whole of the liquid portion of the Paper Currency 
Reserve is not required, in addition to the Gold 
Standard Reserve proper, for this purpose. A busy 
season will soon come when the Government might 
lend some part of its reserves in India without en- 
dangering in the least the stability of its system and 
to the great advantage of Indian trade. It ought, at 
least, to have the power to do this. 

20. The remaining point is this. A provision of 
the above kind for introducing some degree of 
elasticity into the Indian currency system would not 
be very useful in a season such as that of the autumn 
and winter of 1905-6 or of the autumn of 1912-13, 
when there was a demand for rupees on so great a scale 


that it could only be met from the Mint. Additions 
to the currency of this kind can only be made by im- 
porting funds from abroad. But these are permanent 
not temporary additions. Every such addition makes 
a similar demand for new coinage in succeeding seasons 
less likely. They are abnormal, and recent history 
seems to show that these permanent additions to the 
Indian currency are not made by slow and steady 
accretions year by year, but in great bursts of activity 
at considerable intervals. In years of normal 
activity, therefore, there may be considerable stores 
of rupees lying idle in the reserves beyond what 
is required for the safety of the currency. Indian 
bankers and merchants can only get at these rupees, 
so as to obtain a net addition to the currency, by 
buying sovereigns or Council Bills in London. If 
the use for the additional currency is only temporary, 
the cost of transport or remittance is great enough to 
make it not worth their while to get this addition 
until the Indian rate of discount has been forced up 
to a high level. If the Government were free on 
such occasions to lend out some part of the rupees, 
against high-class security, at 5 or even 6 per cent, 
this would be profitable to the Government, and 
would prevent the discount rate from reaching a level 
which is caused, not by anxiety, but merely by the 
expense arising out of the distance between London 
and Calcutta. 



1. THE Fowler Committee of 1898 avowed them- 
selves in favour of the ultimate establishment of a 
gold currency in India as well as a gold standard. 
Paragraph 54 of their Eeport runs as follows : 

"We are in favour of making the British sovereign a 
legal tender and a current coin in India. "We also consider 
that, at the same time, the Indian mints should be thrown 
open to the unrestricted coinage of gold on terms and 
conditions such as govern the three Australian branches of 
the Eoyal Mint. The result would be that, under identical 
conditions, the sovereign would be coined and would circulate 
both at home and in India. Looking forward as we do to 
the effective establishment in India of a gold standard and 
currency based on the principles of the free in-flow and 
out-flow of gold, we recommend these measures for adoption. 

The first part of their proposal was carried out 
immediately, and, in 1899, British gold was declared 
legal tender at the rate of a sovereign to 15 rupees. 
It appeared at first as if their further object of a gold 
currency might soon be attained also. The principle 



of minting gold in India was accepted both, by 
the Secretary of State and by the Viceroy's 
Council, and in 1900 Sir Clinton Dawkins actually 
announced that it had been decided to constitute 
a branch of the Mint at Bombay for this purpose. 
In the meantime an attempt was made, described in 
4, to force sovereigns into circulation. But the 
attempt failed, and Sir Clinton Dawkins's proposal 
was never carried out. As Sir G-. Fleetwood Wilson 
explained in the Legislative Council in 1911 

A number of technical and other difficulties were raised by 
the Eoyal Mint, which ultimately wore out the patience of 
Lord Curzon's Government. In the interval the Kolar gold 
mining companies had mostly entered into agreements for 
the sale of their produce in England ; and the prospect of 
their bringing their gold to be refined and coined at Bombay 
which was to be the pike de resistance of our gold mint 
was thus deferred. In the circumstances it was decided 
in 1902 to drop the project, and to wait until a stronger 
demand for a local gold coinage should arise. 

This account of the matter, however, scarcely does 
justice to the part played by the British Treasury 
in defeating the project. The official correspondence, 
lately published, 1 shows that for two years (from 
1899 to 1901) they made, as Sir G-. F. Wilson 
states, a succession of technical difficulties in a spirit 
of scarcely veiled hostility to the whole proposal. 
But eventually (in May 1901) a scheme was arranged, 
acceptable both to the Mint at home and to the 

1 H. ofC. 495 of 1913. 


authorities in India. At this point in the negotia- 
tions the natural instincts of the Treasury officials 
became uncontrollable, and respect for the independ- 
ence of the India Office had to be abandoned. Their 
first line of defence in the form of technical difficulties 
having been overcome, they fell back upon open 
argument as to the wisdom from the Indian point 
of view of the whole project : 

While expressing their satisfaction that an agreement has 
now been reached, my Lords think it desirable, before 
practical steps are taken to carry out the scheme, to invite 
Lord George Hamilton to review the arguments originally 
advanced in favour of the coinage of the sovereign in India, 
and to consider whether the course of events, in the two 
years which have elapsed since the proposal was made, has 
not tended to diminish their force, and to render such 
advantages as are likely to accrue from the establishment 
of a branch mint wholly incommensurate with the expense 
to be incurred, . . . The gold standard is now firmly estab- 
lished, and the public requires no proof of the intention of 
the Indian Government not to go back on their policy, 
which is beyond controversy. Sovereigns are readily 
attracted to India when required under existing conditions. 
... On the other hand, the estimates of the Government 
of India of gold available for coinage in that country are 
less than was anticipated, nor is any considerable increase 
expected, at any rate for some time. . . . The staff would 
have to be maintained in idleness for a large part of the 
year at considerable cost to the Indian Exchequer. ... It 
is of course for Lord George Hamilton to decide whether, in 
spite of these objections, the scheme is to be proceeded 

The India Office answered thus : 


The establishment of a mint for the coinage of gold in 
India is the clearest outward sign that can be given of the 
consummation of the new currency system ; and to abandon 
the proposal now must attract attention and provoke 
criticism and unrest. . . . His Lordship is not inclined to 
abandon the scheme at the stage which it has now reached. 

The Treasury's reply was cogent : 

My Lords cannot believe that the position of the gold 
standard in India will be strengthened, or public confidence 
in the intentions of the Government confirmed, by providing 
machinery for obtaining gold coins which is neither demanded 
nor required by the mercantile community ; while, on the 
other hand, the failure or only partial success of a gold mint 
would undoubtedly be pointed to by the opponents of the 
gold standard policy (although without justification) as 
evidence of the breakdown of that policy. 

The Treasury's arguments were, as they deserved 
to be, successful. After consultation with the 
Government of India, who drew attention to the 
agreements (referred to by Sir G-. F. Wilson above) 
entered into by the mining companies, the Secretary 
of State agreed (Feb. 6, 1903) to the project's in- 
definite postponement. " No public explanation was 
given in India of this sudden recession from what 
has hitherto been regarded as an essential feature of 
the currency policy inaugurated in 1893 and definitely 
established on the recommendations of the Currency 
Committee of 1898." l 

2. From 1903 up to 1910 little was heard of pro- 

1 This quotation is from a letter addressed by the Government of India to 
the Secretary of State, nine years later (May 16, 1912). 


posals for an active encouragement of the circulation 
of gold. But the intention had never been repudiated, 
and in the Budget debate of 1910 Sir James Meston, 
then Financial Secretary to the Government, spoke as 
follows : 

The broad lines of our action and our objects are clear 
and unmistakable, and there has been no great or 
fundamental sacrifice of consistency in progress towards our 
ideal. Since the Fowler Commission that progress has 
been real and unbroken. There is still one great step 
forward before the ideal can be reached. We have linked 
India with the gold countries of the world, we have reached 
a gold-exchange standard, which we are steadily developing 
and improving. The next and final step is a true gold 
currency. That, I have every hope, will come in time, but 
we cannot force it. The backwardness of our banking 
arrangements, the habits and suspicions of the people, the 
infancy of co-operation all stand in the way. But the 
final step will come when the country is ripe for it. I 
trust that will not long be delayed ; for when it comes, it 
will obliterate all the mistakes, all the inconveniences, all 
the artificialities, of our present position. 

In March 1911 matters were carried a step further, 
Sir Guy Fleetwood Wilson replying in the Legislative 
Council to Sir Vithaldas Thackersey (who had argued 
that a 10-rupee gold coin ought to be minted and 
put into active circulation in India) that "much has 
happened since 1902 which justifies the reopening of 
the question." In a despatch to the Secretary of 
State, dated May 16, 1912, the Government of India 
proposed to open the Bombay Mint to the coinage of 


sovereigns. This is an exceedingly confused docu- 
ment. It is mainly directed to showing that an 
increased use of gold as currency in India would be 
advantageous to the system. But, apart from the 
validity of this argument, it is not clearly shown in 
what way the establishment of a mint would effect tlie 
desired purpose ; indeed it is explicitly admitted tha,t 
cc in proposing to open a gold mint it is not our in- 
tention to induce thereby an increased flow of gold 
to India. Indeed were that our purpose we recognise 
that it would certainly fail." The despatch reads as 
though it were an attempt to reconcile divergent and 
contradictory views which had received expression. 
The British Treasury, however, has again come to the 
rescue. They have stipulated either that the branch 
mint should be under Imperial management, which 
would be inconvenient, or that it should be wholly 
separate, which would be expensive. Accordingly, in 
a despatch, dated October 18, 1912, the Secretary of 
State suggested to the Government of India that 
instead of sovereigns Indian gold coins of the de- 
nomination of, say, 10 rupees should be coined at 
Bombay. The Government of India have replied that 
they prefer this proposal to the conditions demanded 
by the Treasury, and that they contemplate making 
inquiries as to Indian opinion on it. This is how 
the matter stands at present. 

The actual policy of the Government of India since 
1900 as regards gold currency has been, in my opinion. 


well judged. But these negotiations show that the 
authorities are still doubtful as to the advantages 
of the existing system. 

3. Up to 1870 the English currency system was 
the envy of the rest of the world, and it was supposed 
that the excellencies of the practical working of 
this system were due to the fact that the actual 
circulating medium of the country was gold. This, 
it was thought, must be the only really safe way of 
maintaining absolute stability. Germany, accord- 
ingly, when she instituted her gold standard, pro- 
hibited the issue of notes of a less denomination than 
100 marks, in order that gold might actually circulate 
from hand to hand to a maximum possible amount. 
For similar reasons the business community showed 
themselves immovably hostile to Lord Goschen's pro- 
posals for the issue of one-pound notes in England. 
While other countries, who have, with few excep- 
tions, found the expense of a gold medium of 
exchange prohibitively heavy, have nevertheless 
envied those who could afford it, and have adapted 
their laws, even when they could not afford to adapt 
their practice, to a currency of gold. 

But in recent years the evolution of currency has, 
for reasons which I have elaborated in Chapter IL, 
embarked upon a new stage of development, and all 
this is changed. In England the use of a cheque 
currency has grown so universal that the com- 
position of the metallic coin has become a matter of 


secondary importance. In Germany the policy of 
1876 has been deliberately reversed by a recent 
revision of the Bank Act, and 20-mark notes are now 
issued with the deliberate object of keeping as much 
gold as possible in the bank and wasting as little as 
possible in circulation. This new policy is likely to 
be extended in the future. The President of the 
Keichsbank, addressing the Budget Committee of the 
Eeichstag in January 1913, argued that the rule laid 
down in 1906, forbidding the free issue of 20- and 50- 
mark notes to an amount exceeding 15,000,000, 
would have to be repealed, the issue of these notes 
in 1912 having exceeded the limit by 11,500,000 ; 
and he went on to say that they must, in the 
interests of sound policy, increase the issue of .notes 
and thus hold a larger quantity of gold in their 

In other countries, where actual currency is the 
principal medium of exchange, the attempt to 
introduce gold as the medium passing from hand to 
hand has been for the most part abandoned. A 
great part of the new gold has flowed, during the 
last ten years, into the reserves of the State Banks, 
and a comparatively small amount only can have 
found its way into circulation. In Austria-Hungary, 
for example, after the currency reform of 1892, 
attempts were made to force gold into circulation 
just as they were in India. They luckily failed. The 
authorities of the Austro-Hungarian Bank now keep 


all the gold they can in their central reserves, and they 
are not likely to make another attempt to dissipate 
it. The same kind of thing occurred in Russia. After 
establishing with difficulty a gold standard, they 
began with the theory, and have since abandoned 
it, that a gold currency was the natural corollary. 
Other examples could be given. A gold standard is 
the rule now in all parts of the world ; but a gold 
currency is the exception. The "sound currency" 
maxims of twenty or thirty years ago are still often 
repeated, but they have not been successful, nor 
ought they to have been, in actually influencing 
affairs. I think I am right in saying that Egypt 
is now the only country in the world in which 
actual gold coins are the principal medium of 
exchange. 1 

The reasons for this change are easily seen. It 
has been found that the expense of a gold circulation 
is insupportable, and that large economies can be 
safely effected by the use of some cheaper substitute ; 
and it has been found further that gold in the 
pockets of the people is not in the least available at 
a time of crisis or to meet a foreign drain. For 
these purposes the gold resources of a country must 
be centralised. 

1 The value of the token coins (silver, nickel, and bronze) circulating in 
Egypt and the Sudan is estimated at no more than E3,600,000, and the 
notes of the National Bank of Egypt (chiefly current in the large towns) at 
E2, 400,000. The whole of the rest of the currency consists of gold coins 
(chiefly British sovereigns). The existing position in Egypt is, therefore, the 
ideal at which many Indian currency reformers seem to aim. 


This view has long been maintained by economists. 1 
Bicardo's proposals for a sound and economical cur- 
rency were based on the principle of keeping gold 
out of actual circulation. Mill (Political Economy, 
Bk. III. chap. xxii. 2) argued that " gold wanted for 
exportation is almost invariably drawn from the 
reserves of banks, and is never likely to be taken 
from the outside circulation while the banks remain 
solvent." While Goschen spoke as follows in 1891 
before the London Chamber of Commerce : 

We only have as an effective circulation that which is 
required for the daily wants of the people. You cannot 
tap that to any extent so as to iucrease your central stock 
of gold. You may raise your rate of interest to 6 per cent 
or 8 per cent, but the bulk of the people will not carry less 
gold in their pockets than they did before, and I doubt 
whether, from other quarters, you would be able to get 
much addition to your central store. 

But while it is no new theory that gold in the 
pockets of the people is absolutely useless for the 
purposes for which a currency reserve is held, all 
but the highest authorities have believed until fairly 
recently that no gold standard can be really stable, 
unless gold actually circulates in the country. The 
contrary view was distrusted by practical financiers, 
and only of late years has it become powerful enough 
to dictate policies. At last, however, Governments 
have been converted to it, and it is now as much 

l See Lindsay's evidence before Indian Currency Committee (1898), 


their anxiety to keep gold out of circulation and in 
their reserves as it was formerly the opposite. 

A preference for a tangible gold currency is no 
longer more than a relic of a time when Governments 
were less trustworthy in these matters than they are 
now, and when it was the fashion to imitate un- 
critically the system which had been established in 
England and had seemed to work so well during the 
second quarter of the nineteenth century. 

4. Let us now apply these general considerations 
to the case of India. In 1900 an attempt was 
seriously made to get sovereigns into active circu- 
lation, in accordance with the recommendations 
of the Committee of 1898. It was decided to pay 
out gold to the public as soon as the stock should 
exceed five millions sterling, and such payments 
commenced on January 12, 1900, at the currency 
offices in Calcutta, Madras, and Bombay. The instruc- 
tions issued were to tender gold to all presenters of 
notes, but to give rupees if they were preferred. 
Later on the Comptroller-General was authorised to 
send sovereigns to the larger district treasuries. And 
in March the Post Offices in the Presidency towns 
began to give gold in payment of money orders, and 
the Presidency Banks were requested to issue sove- 
reigns in making payments on Government account. 
These arrangements continued in force throughout 
the financial year 1900-1901, and by March 31, 
1901, the amount put into the hands of the public 



reached the considerable total of 6,750,000. But 
of this amount part was exported, not far short of 
half was returned to Government, and it was supposed 
that the greater part of the remainder went into the 
hands of bullion dealers. 1 Further attempts to force 
gold into circulation were, therefore, abandoned, and 
a large part of the gold which had accumulated in 
the currency reserve in India was, a little later on, 
shipped to England in order to be held " ear-marked " 
at the Bank of England. 

Since that time the provisions of the Indian system 
regarding gold (as already given in Chapter I.) have 
been as follows : (l) The sovereign is legal tender 
in India at 15 rupees to 1 ; (2) the Government 
has bound itself by Notification to give rupees for 
sovereigns at this rate ; (3) it is willing, as a rule, 
to give sovereigns for rupees at this rate, but is 
under no legal obligation to do so, and will not 
always exchange large quantities. 

5. The defeat of the experiment of 1900-1901 was 
due to a variety of causes, but mainly, I should sup- 
pose, to the long habituation of the Indian public to 
the use of silver, and to the unsuitability of the 
sovereign, by reason of its high value, for so poor 
a country as India. 

But it is not by any means so certain that an 
attempt at the present time to put a 10-rupee gold 

1 The above account is summarised from the Reports of the Comptroller 
of Paper Currency for 1900 and 1901. 


coin into circulation would not meet with, more 
success. Its value would be somewhat less. But, 
more important than this, the taste of India for gold, 
as against silver, has been very considerably developed 
during the last ten years. It will be worth while to 
summarise the available evidence as to the present 
position of gold in India. 

6. We know, of course, what the annual net addi- 
tion to the total stock of gold in India (i.e., the 
imports and the production less the exports) approxi- 
mately is although the amount of the steady leakage 
across the land frontiers is usually neglected. 1 We 
know also how much of this addition is in the form 
of sovereigns, and how much in the form of gold bars. 
By making allowance, therefore, for the increase or 
decrease of sovereigns in the Paper Currency Eeserve 
and the Government Treasuries, we can calculate how 
many sovereigns have found their way each year into 
the hands of the public. But as to the uses to which 
the public put the sovereigns our information is ex- 
ceedingly vague and unprecise. By far the most 
careful and valuable discussions of the question are to 
be found in the Eeports of the Comptroller-General of 

1 This is probably very considerable. India must be the main source of 
supply of gold for the whole of Central Asia. The following extract from a 
report sent in to the Comptroller of Currency (1911-12) is instructive: 
"From Peshawar a considerable absorption of gold in connection with the 
trans-border trade is reported ; this trade is said to have amounted during 
1911-12 to the value of Rs. 30 lakhs. Gold so taken seldom or never returns. 
The Amir's subsidy is also largely paid in gold." It is also reported that 
gold is preferred by those who go 011 pilgrimage to Mecca. 



Paper Currency for 1910-11 (written by Mr. R. W. 
Gillan) and for 1911-12 (written by Mr. M. R 
Gauntlett) ; and I have made free use of these in 
what follows. First, it will be useful to have 
before us the statistical information referred to 
above : 






Net Addition 
to Stock of 
Gold : 
Imports - Ex- 

Net Addition to 
Gold in Paper 
Currency Ke- 

Net Addition 
to Stock of 
Gold in Hands 

Net Addition 
to Bullion in 
Hands of 

Net Addition 
to Sovereigns 
in Hands of 

ports + 

serve and 
Treasuries. 1 

of Public. 



































- 193,000 


































1912-13 2 






Since 1908 the whole of this has been held in sovereigns. 

T I & 

7. The enormous amount of wealth which the 
Indian people are now devoting to the barren accum- 
ulation of gold is brought out very strikingly by the 
figures in the third column. We know that it is 
hoarded, used as jewellery, as gilding, even (according 
to Messrs. Samuel Montagu) as medicine. But these 
figures are not relevant to our present purpose, and 
we must turn to the figures in the last column, giving 
the flow of sovereigns into the hands of the public. 
What part of this total is employed for ornament, 


what part for hoarding, what part is melted down, 
and what part is left truly to serve as currency ? 

In the first place it is estimated that about 
1,000,000 "shield" sovereigns are now imported 
annually. These are sought after for purposes of 
ornament and stand at a premium, 1 It may be safely 
assumed, therefore, that they are not used as currency. 
Further, it is certain that a large number are melted 
every year and used as bullion. There are two causes 
of this. <c As regards melting," writes Mr. Gillan, 2 
"it is to be noted that for certain purposes the 
sovereign has at all times an advantage. Gold being 
sold in 5- and 10-ounce bars, if a jeweller wants only 
a small quantity, a full-weight sovereign meets his 
purpose very well, as he knows its exact weight, 
fineness, and value, and has no trouble in obtaining it. 
And the sovereign is presumably cheaper than the 
same quantity of gold in out-of-the-way parts." 
There is also another cause, connected with the 
exchanges ; 3 at some times of year the cheapest way 
of getting gold is to buy sovereigns for rupees from 
the Government. This explanation is borne out by 
the fact that there is a steady demand for sovereigns 
from the Government's reserves during the summer 
months. This is the time when the exchanges make 
it most advantageous to get gold in this way, and when 
there is least likely to be a demand for sovereigns as a 

1 Throughout 1911-12 the Bank of Bengal quoted them at a premium 

2 Report on Paper Currency, 1911-12. 3 Sec pp. 97-99. 


medium of exchange. Many sovereigns, therefore, are 
melted. Bat we should be making rather a random 
guess if we were to attempt to say how many. 

There must still remain, as the result of recent 
importations, a large number of sovereigns retained 
in the hands of the public in that form. But we 
cannot assume that even this reduced total is truly 
employed as a medium of exchange. There is a good 
deal of evidence for supposing that in some parts of 
the country sovereigns are displacing rupees for the 
purpose of hoards. This may be the case even when 
in the first instance the gold is used for currency. 
The crops may be sold for gold, because the cultivator 
wants gold for his hoard. " It is quite conceivable," 
Mr. Grillan points out, " that the acceptance by the 
cultivator of gold in payment of his crops is in the 
nature of barter ; that is to say, he takes the gold not 
as coin merely but for some other purpose, and the 
return of gold in payment of revenue may be no more 
than, the return of so much as he finds himself 
unable to retain." 

8. It is clear, then, that we must not fly from a 
glance at column (1) of the table on p. 76, or even from 
a glance at column (5), to extravagant conclusions as 
to the present position of the sovereign in the Indian 
currency system. Many heavy deductions must be 
made from the first totals. What direct evidence is 
there as to the use of gold as currency ? 

" The best indication " (to quote Mr. Gillan again) 



"of the extent to which sovereigns have established 
themselves as a regular part of the currency, is to he 
found in the figures of receipts at Post Offices and 
Railways." These have been as follows : 

Post Offices. 




















i Second half-year only. 

It has been estimated by the Paper Currency De- 
partment l that in 1907, as a result of the absorption 
of earlier years, not less than two millions were in 
circulation. But it is supposed that by the end of 
1908 nearly the whole of that amount had disappeared. 
Owing to the depression of that year and the low 
level of the exchanges, the most profitable employ- 
ment of the sovereigns was as bullion. This is 
strikingly borne out by the almost negligible receipts 
of gold (given below) by Post Offices and Railways in 
1909-10. Until 1910 the absorption of sovereigns 
was not sufficient to restore them to a position of any 
importance as currency. We have chiefly to consider, 
therefore, the imports of sovereigns since 1910. It 
is from this source that the sovereigns now circulat- 
ing as currency are likely to have come. 


9. When we proceed to detail, it appears that 
there are several important parts of India in which 
the use of the sovereign is still negligible in Bengal, 
Eastern Bengal, Assam, the Central Provinces, and 
Burma. In these provinces it has not begun to make 
any serious headway. In the United Provinces (for 
the purchase of wheat) and in certain districts of 
Madras, on the other hand, sovereigns seem to 
circulate to some extent, to be received freely by the 
general public, and to be increasing, though at no 
sensational rate. In Bombay and the Punjab, par- 
ticularly in the latter, their use is, however, much 
more important. Most of the detailed evidence, which 
is available, refers to the Punjab ; and care must be 
taken not to apply to the whole of India opinions 
from witnesses in that province as to the present 
position of gold. The following extract from a re- 
solution passed by the Punjab Chamber of Commerce 
on June 4, 1912, is interesting. The Chamber "are 
able to state authoritatively that sovereigns are 
becoming popular and that their circulation is in- 
creasing. They are accepted as legal tender in the 
bazaars, and this may be attributed to the intelligence 
of the people and to the fact that all over the East (in 
China and the Straits Settlements), where the Punjab 
Sepoys serve in the army and the police, the sovereign 
is popular. These men remit their earnings in gold, 
and as there is hardly a village in the Punjab that 
has not sent a man to these services, it is not sur- 


prising that the value of the sovereign is understood 
It is difficult to say to what extent sovereigns are 
being hoarded, but that they are held up by the 
well-to-do to a very considerable amount is un- 
doubtedly the case ; and hoarding will continue 
among the rural population for years to come. 
With regard to the probable effect this importation of 
sovereigns may have on exchange, they are of opinion 
that Government should not rely on the sovereigns 
that are being absorbed by the districts in exchange 
for produce and in the shape of savings coming out at 
any time in any appreciable quantity to support the 
stability of the rupee." In 1911-12 the Comptroller 
of Currency collected a number of district reports as 
to the growing popularity of gold in the Punjab. 
They completely corroborate the above summary. 

10. Before we pass on to other aspects of the 
question, a word may be added with special reference 
to the very large gold imports of quite recent date 
(i.e., in 1912). Popular attention has been attracted 
by the figures for that year, which are indeed truly 
remarkable. 1 The gold imports of 1911-12 and 
1912-13 (see table on p. 76) were noteworthy as 
compared with those of former years by reason of 
their huge aggregate amount; but they were even 
more noteworthy if regard be had to the very high 
proportion of sovereigns. 

1 In the calendar year 1912 India increased her stock of gold by 
29,500,000, of which about 21,500,000 was in sovereigns. 



I do not believe, however, that a conclusion can 
fairly be drawn from these figures as to any startling 
change in the position of the sovereign in India. 
India has experienced two very good seasons and has 
been able, therefore, to accumulate savings to an 
unusually large extent for investment in gold orna- 
ments and hoards. Is this altogether inadequate as 
a partial explanation of the recorded figures ? I do 
not, for the following reasons, think it is. 

In the first place the gold imports for 1911-12 
fall short of, and those for 1912-13 do not much 
exceed, those for 1910-11 if we exclude the addi- 
tions to the Paper Currency Reserve. Imports of 
gold for this purpose are, for reasons to be explained 
in Chapter V., quite independent of the effective 
desire of India for gold, and occur merely because 
gold happens in some circumstances to be a cheaper 
means of remittance to India than Council Bills 
or any other method. In the second place the 
conditions of 1912 were somewhat abnormal on 
account of the unusually large supplies of gold 
which were available from Australia and Egypt. If 
it is a matter of importing gold from England, those 
who want it for bullion purposes will generally find 
it cheaper to buy gold bars than to buy gold coin. 
But if there are sovereigns on their way from Australia 
and ready to be diverted to India, or if there are 
surplus sovereigns available for export at Alexandria, 
it may be a good deal cheaper to buy these sovereigns 


than to get gold bars from London. The explanation 
of this, depending on the foreign exchanges, is fully 
discussed in Chapter V. I suspect, therefore, that 
a higher proportion than usual of the sovereigns 
imported in 1912 were put to non-currency uses for 
which gold bars would have served just as well. If 
sovereigns rather than bars are import ed/rom London 
it is reasonable to draw the conclusion that the 
importer (since he must pay a higher price) definitely 
prefers them. But if sovereigns are imported from 
Egypt or Australia rather than bars from London, no 
such conclusion can be drawn. Of the 21,500,000 
sovereigns imported into India in 1912 only about 
5,000,000 came from London the rest from Egypt 
and Australia. 1 From the gross figures of gold 
imports into India in 1912 even heavier deductions 
than usual must be made, therefore, before we have 
an indication of the extent to which additional 
sovereigns have really found their way into the 
currency. 2 

1 The fluctuations in the proportions for different years of the figures in 
columns (4) and (5) of the table on p. 76 must certainly be explained in 
part by the state of the exchanges, and not wholly by the degree of deliberate 
preference for sovereigns. 

2 The Accountant-Genera], Bombay, has suggested (see Paper Currency 
Report, 1911-1912) that "the principal cause" of the heavy importation of 
sovereigns has been a reduction in the rate of charge (from fg- per cent to 
3 \ per cent) for Telegraphic Transfers issued upon Madras and Calcutta 
against gold imported into Bombay. No doubt, this favours gold to a 
slightly greater extent than before, as against Council Transfers, as a means 
of remittance from London to Madras and Calcutta, but the difference seems 
too small in relation to the other factors which determine the cheapest form 
of remittance, for the change to have exerted any appreciable influence. 


11. Perhaps we may fairly sum this evidence up 
by saying that it goes to show the existence in India 
at the present time of an enormous demand for gold 
bullion, a very considerable demand for sovereigns for 
purposes of hoarding, and a relatively smaller demand 
for them, chiefly confined to the United Provinces, 
the Punjab, Madras, and Bombay, for purposes of 

Those who think that this tendency to use gold 
coins should be further encouraged have advocated 
three methods of doing so : by making arrangements 
for the coinage of sovereigns at Bombay ; by the 
mintage there of some distinctively Indian coin of the 
denomination of 10 rupees ; by a deliberate attempt 
on the part of Government, as in 1900-1901, to force 
sovereigns into circulation and to familiarise parts of 
the country with them where they are at present 
unfamiliar, even to the extent of refusing to issue 
more rupees on demand. 

12. I have placed these proposals in the order of 
their probable efficacy to effect their purpose. I see 
no reason why the first the coinage of sovereigns at 
Bombay should have any effect at all towards 
increasing the use of sovereigns as currency. Four 
types of occasion can be distinguished on which gold 
bars might be presented at Bombay for coinage : 

(a) Gold might be deliberately imported from 
England for the purpose ; or it might occasionally 
happen that importers of gold bars, having tempor- 


arily miscalculated the demand for bars, would wish, 
to sell these bars to the Government. 

(b) Owners of Indian gold mines might conceivably 
find it worth their while to suspend the arrangements 
they have made in recent years with English refiners 
and might sell their gold (about 2,000,000 annually) 
to the Bombay Mint. Whether or not they would 
find it worth while to do this would presumably 
depend on the facilities for refining in India and the 
terms offered by the Bombay Mint. 

(c) The habits of the people might be changing, 
the importation of new bars from England ceasing, 
and the people wishing to get rid of the bars and 
ornaments they already had. 

(d) In times of famine or depression the people 
might sell their bars and ornaments to the Mint 
when they were driven to turn their ultimate resources 
into money. 

Provided the Bombay Mint did not offer to coin 
on more favourable terms than the British Mint, which 
presumably it would not do, it seems exceedingly 
unlikely that bar gold would be imported from 
England on purpose to be coined in India rather 
than in England. But if this were to happen, it 
would have no consequences worth thinking about. 
The place of mintage is a matter of indifference. In 
all the other eventualities, suggested above, the gold 
is brought to the Mint, not to satisfy a demand for 
new gold currency, but because the owners of the 


gold wish to sell it. The sellers would take payment 
in sovereigns, notes, or rupees (since the former can 
always be exchanged for the latter), as might suit 
their convenience. In cases (o) and (d) the Govern- 
ment would probably be forced in the end to export 
the sovereigns it had itself minted, and to bear the 
cost of export as well as the cost of minting. 

The chief result of mintage at Bombay, therefore 
(assuming that the terms for coining were sub- 
stantially the same as in England), would be a small 
saving of expense to sellers of gold in India. Im- 
porters of gold bars would be saved occasionally a 
small loss of interest due to miscalculation ; owners 
of Indian gold mines might conceivably pay, at the 
expense of Government, infinitesimally higher divi- 
dends; the people turning their hoards into money 
would be able to save the expense of sending the 
gold to England. A corresponding cost would fall 
on the Government, for mintage in the first instance 
and sometimes for export afterwards. These conse- 
quences, whether desirable or not, have very little to 
do with currency questions. The last of themthe 
making it easier to turn hoards into money is very 
likely desirable. But all of them could be brought 
about more cheaply without the establishment of a 
Bombay Mint. It would be sufficient if the Govern- 
ment were to publish terms on which it was ready to 
buy gold bars. It might be a real convenience if 
Government notified it* readiness to purchase bars 


tendered in India at Ks 58 annas 5 per ounce 1 
(payable in silver or notes or sterling drafts on London 
or in sovereigns, on the present system, if they were 
available). 2 The Government would be involved, from 
time to time, in the cost of export ; but this cost it 
would have to bear, I believe, just as often if there 
were a mint, while the cost of the mint itself would 
be saved. Such a notification, as is suggested above, 
would be much more in the true spirit of the Indian 
currency system than the establishment of a gold 
mint would be ; and it would serve the convenience 
of the public just as efficiently, at less expense to 
Government. The establishment of a Mint, however, 
would flatter at small expense an ignorant vanity. 
The Government by granting it in response to popular 
appeal (though I doubt whether, in fact, there is any 
such appeal) would have a pleasant feeling of being 
democratic on an occasion when to yield involves 
no more evil than any other expenditure on a piece 
of fairly cheap ostentation. 

13. To the second proposal for the mintage of 
a distinctively Indian gold coin many of the above 
comments apply equally. But the existence of a 

1 This corresponds to the Bank of England's normal price for gold 

2 At present notes can be issued by currency offices, but only to treasuries 
on the requisition of the Comptroller- General, in exchange for gold bullion 
at the rate of 1 rupee for 7*53344 grains troy of fine gold. Since April 1, 
19 07, the receipt at the Indian Mints of gold bullion and gold coins other 
than sovereigns and half-sovereigns has, in fact, been stopped by Government; 
of India Notification. 


10-rupee gold piece (13s. 4d.) might very possibly do 
something to popularise the use of gold as currency, 
largely because it would be of a smaller and therefore 
more convenient denomination. 1 It is very difficult 
to prophesy with regard to the local popularity of 
a new coin. On the other hand apart from the 
general objections, to be dealt with later, against 
popularising gold it is generally a bad thing to 
introduce a new coin and add to the confusion of 
currencies. For purposes of export, at times of de- 
pression, the 10-rupee piece would be worth less than 
two-thirds of a sovereign. The sovereign, moreover, 
is fast becoming the international gold coin par ex- 
cellence far beyond the bounds of the British Empire. 
In 1911, 43,305,722 British sovereigns were minted, 
or a good deal more than the whole gold coinage in 
that year of the rest of the world, viz. 33,375,455. 
A rival coin ought not to be set up in India 
unless some evident advantage is to be obtained 
from it. 

14. The third policy that of active measures on 
the part of Government to get more gold into 
circulation is not likely to be adopted. If it were, 
it is difficult to say if it would be successful or not. 
To force a coin on people is not always the best way 
to popularise it ; and if rupees were to be refused, 
there would probably be a small premium on them 

1 I have, however, seen no evidence which suggests that Aa^-sovereigns 
are specially popular on account of their lower denomination. 


or a small discount on gold a position which, would 
not help gold. 

15. It is probably the case, however, that if it 
were desirable to popularise the use of gold, a means 
could be found of effecting this in some degree. The 
main question is whether this is, in fact, the right 
policy. Lord Crewe looks forward (see his speech in 
the House of Lords, November 14, 1912) " with some 
confidence to the increased use of gold currency in 
India among the people, although it may be a long 
and indefinite time before it becomes the habitual 
and favourite coin in the country at large." Ought 
he to expect this result with satisfaction as well as 
confidence ? 

My own answer to this question is unhesitatingly 
in the negative. The principal arguments against 
such a policy are two, first, the general argument 
that it is extravagant and wasteful to have gold coins 
as the actual media of circulation, and second, the 
argument, more especially applicable to India, that 
it would diminish, and not, as its advocates claim for 
it, increase the stability of the currency system as a 

16. Let us consider first how heavy a loss and ex- 
pense the popularity of a gold currency might involve. 
During the last twelve years the Government have 
been able to accumulate a sum of about 21,000,000 
sterling from the profits of rupee coinage ; and the 
interest on the invested portion of the Paper Currency 


Reserve is now about 300,000 annually. Thus the 
annual income, derivable from the interest on the 
sums set free by the use of cheap forms of currency, 
amounts already to about 1,000,000. With the 
rapidly increasing use of notes, this income should 
show a steady growth in the future. Both these 
sources of profit would be gravely jeopardised if the 
introduction of an Indian gold coin were to meet 
with any considerable measure of success. It would 
be specially unfortunate if a competitor to the paper 
currency were to be introduced, before the virtual 
abolition of the system of circles has had time to 
have its full effect in the direction of popularising 
the use of notes. 

17. Advocates of a gold currency, however, would 
not, I think, deny that it might involve the country 
in some extra expense. They support their policy 
on the ground that it would do a great deal to ensure 
the stability of the currency system, and that it is 
worth while to incur some expense for this object. 
I think it is possible to show that such a policy is 
likely on the whole to have an exactly opposite effect- 
It is suggested that the currency should be com- 
posed of rupees, gold, and paper, with rupees still 
predominating, but consisting of gold in a considerably 
higher proportion than at present. This greater 
infusion of gold would necessarily be at the expense 
either of the Currency Eeserve or of the Gold Standard 
Reserve. If the gold replaced notes, the former 


would be diminished, and, if it replaced rupees, the 

It is tacitly assumed that the greater part of what 
has to be withdrawn from the circulation at a time 
of crisis would come from the gold portion of the 

This assumption seems to me to be unwarranted 
and contrary to general experience. At a time of 
crisis it is the fiduciary coins with which the public 
are most eager to part. Bankers and others would 
keep as much of their surplus currency as they 
possibly could in the form of gold, and it would be 
rupees (in great part) and not gold that would be 
paid into the Government Treasuries. 

Thus the infusion of more gold into the circulation 
would necessarily weaken the existing reserves and 
would not correspondingly reduce the amount of such 
reserves which Government ought in prudence to keep. 
When it became necessary to contract the volume of 
currency, Government would be in a worse position 
than at present, unless the greater part of what was 
withdrawn came from the gold portion of the 
circulation and not from the rupee or paper portion. 
This is not an expectation upon which it would be 
prudent to act. 

I have already quoted the late Lord Goschen's 
authority in support of the centralisation of gold 
reserves. A further passage from the address he 
delivered on the same occasion (in proposing a 


scheme of one-pound notes for England) is relevant 
here : ec I would much prefer for national and 
monetary purposes to have 20,000,000 of gold 
under our command at the Bank of England than 
30,000,000 sovereigns in the hands of the public. 
... If the issue (of one-pound notes) took place, 
and were taken up, we should have 20,000,000 more 
central gold an immeasurably stronger reserve than 
30,000,000 sovereigns on which we could not place 
our hands/' 

18. There are, in fact, two ways of maintaining 
stability in a country whose demand for currency 
varies widely from j^ear to year either it must 
consist almost wholly of gold, or a sufficient reserve 
must be concentrated in the hands of Government 
If only one-quarter or one-fifth of the circulation 
consists of gold, I do not think that a Government 
can rely on getting more than a fraction of this, 
when it becomes necessary to contract the circulation 
by one-sixth or one-seventh; whereas if the gold is 
in the Government's reserves, the whole of it is 

For obvious reasons of convenience and of 
economy the greater part of the Indian circulation 
must continue in any case to consist of rupees. It is 
vain to suppose that the advantages of a true gold 
currency can be obtained by the compromise of some- 
what increasing the gold element. If the Govern- 
ment dissipates some part of its sterling resources 


over the country and any proposal for a greater in- 
fusion of gold into tlie currency amounts to thisit 
must plainly stand in a weaker position to meet a 
crisis than if they are concentrated in its own chests. 

19. The encouragement of gold, therefore, would 
involve expense, and, at the same time, diminish 
safety. There is a further argument against it, 
connected nevertheless with the above, which is of 
great importance. 

If gold were to supplant rupees only and not 
notes, and were to supplant them to so great an 
extent that sovereigns would tend to flow out of 
the 'currency at times of depression, there might be 
something to be said for it. It is certainly the case 
that it is a disadvantageous thing for India to have 
so large a part of her currency in the form of 
expensive tokens, -the issue of rupees strengthens 
the reserves by less than a half of their nominal 
value. The degree of damage to the Government's 
reserves, therefore, would be much less if the gold 
were to supplant rupees than if it were to supplant 
notes. But this is most unlikely to be the case. 
It is for comparatively large payments that the 
sovereign may gradually come into use, and for 
these it is essentially a rival to the note. For small 
payments, which in India make in the aggregate an 
enormous total, the sovereign can no more supplant the 
rupee than it can supplant the shilling in England. 

Reports collected by the Comptroller of Currency 


in 1911-12 already show in a striking way the 
tendency of gold to take the place which is, or might 
be, occupied by notes. The rapidity with which 
gold is becoming popularised in the Punjab is prob- 
ably due in very great part to the fact that notes 
have never become acclimatised there. 1 The incon- 
venience of making large payments in silver is 
obvious ; 2 and facilities for obtaining gold are natur- 
ally welcomed. The events of the last two or three 
years may have done very great harm in the direction 
of postponing the development of the use of notes in 
Northern India. In Bengal and Eastern Bengal, on 
the other hand, the slow progress made by gold is to 
be explained by the fact that the people of these 
provinces are much more accustomed to the use of 
notes, which are even used in some cases for the 
purpose of hoarding (cf. p. 165). If the Government 
were to attempt to further in any way the circulation 
of gold in the Bengals, they would be aiming a 
dangerous blow at their own note issue ; whereas if 
notes could be encouraged in place of rupees in the 
jute trade, there would be a huge increase in their 
circulation. It is also reported that the use of gold 
in the rice trade in Burma would displace notes 

1 The Manager of the National Bank in the Punjab reported in 1911- 
1912 : {( The fact of currency notes having always been unpopular throughout 
the Punjab and, excepting in Lahore, being cashed only at a considerable 
discount, has no doubt conduced to the popularity of the sovereign. A 
portable medium commanding its full face value was urgently required and 
the sovereign has for the present met the want." 

2 6000 in rupees weighs more than a ton. 


mainly. The following quotations from the reports 
(collected in 1911-12 by the Comptroller of Currency 
from districts in the Punjab), referred to above, 
illustrate the point that gold is preferred to silver 
because it is more convenient to carry, and that 
notes are distrusted because there is no universally 
spread assurance of their ready convertibility. 1 

Gujmnwala. The zamindar prefers to have his price 
for the grain in gold, as he can easily carry it and easily 
exchange it and, if necessary, easily put it away. He 
shies at currency notes of any value, as they cannot be 
easily exchanged, and to receive payment in silver means 
cost of carriage and a greater risk of being robbed. Con- 
tractors of the Canal Department are very glad to receive 
payment of their cheques in gold Some have remarked 
that sovereigns can be exchanged even in the village most 
remote from civilisation, but notes, even of the value of 
Ks. 5, are looked upon with distrust by the village yokel 
and even by the village sahukar. With a sovereign there 
is no trouble, no awkward questions are asked and no 
discount taken. 

Jhang. The people prefer gold because it is less trouble- 
some than silver money. 

Gurdaspur. The facility of transit is the reason why 
corn merchants prefer sovereigns to silver. 

Amlcda. Both in cities and villages, sovereigns are 
replacing notes more than rupees. 

Bann%. Gold is slowly but steadily replacing currency 

Rohtak. (With the increase of gold) a corresponding 
decrease in the use of currency notes has been observed 
during 1911-12. 

1 The Government should probably instruct its officers to receive and 
change notes with freedom on every possible occasion, in order to dissipate 
this idea. 


Ludhiana. (With the increase of gold) the issues of 
notes have correspondingly decreased. 

These particular statements are corroborated by 
general statistics. The most recent statistics of the 
use of 10-rupee notes in the Punjab and in Bombay, 
as compared with Bengal, strongly suggest that the 
recent development of gold circulation in these 
provinces has been at the expense of these notes. 
"In the Punjab it is reported (in 1911-12) that 
large payments for agricultural produce are never 
made in notes, and that gold is replacing notes to 
some extent even in ordinary payments among 
merchants and traders." In the light of these facts, 
it is a wonderful tribute to the enduring power of 
the "sound" currency maxims of the middle of last 
century that responsible officials should have wel- 
comed the outflow of gold as the salvation of their 

Before leaving this topic I wish to emphasise, in 
close connexion with it, a special reason why it is 
so important to develop the use of notes in India 
at the present time. It is desirable to encourage 
the popularity of the note issue, and to avoid 
encouraging its rivals, not only for reasons of 
immediate economy or because, by the centralisation 
of the reserves, the stability of the currency is 
increased, but also because, in a country where 
cheques are not likely for many years to come to be 
used to a dominating extent, it is only thus that a 


proper degree of seasonal elasticity in the currency can 
possibly be secured. This question has been already 
raised in Chapter III., and I shall return to it again 
in Chapters VI. and VII. 

20. One minor indirect consequence of the exist- 
ing system is worth reference. Gold flows into the 
Currency Reserve when this is a cheaper way of get- 
ting notes or rupees than by buying Council Bills or 
Transfers (see Chapter V.). It flows out of the 
Currency Eeserve when sovereigns are wanted for 
circulation or for hoarding, or when this is the 
cheapest way in which bullion dealers can get gold. 
There is reason for thinking that a good deal flows out 
for the last reason, and it is the occasion of this out- 
flow which I wish to examine in a little more detail. 
The Currency Department publishes figures which 
show the number of sovereigns withdrawn from the 
Treasuries each month. It appears from these that, 
while some are withdrawn in the winter months 
during the busy season, when the demand for currency 
and for hoarding (since it is then that the cultivators 
sell their crops and realise their savings in coin) is 
at its height, there is in the summer also, when it 
is most improbable that an extra supply is required 
for these purposes, a steady and, in the aggregate, 
a heavy drain. A brief arithmetical calculation 
provides what must, I think, be the explanation of 
this. Since the price of bullion in London is 

(normally) 3:17:9 per oz., while the price of 



sovereigns is 3:17: 10^, the bullion import point 
of Indian exchange will be a little below the sovereign 
import point. Thus when exchange is fairly high, an 
Indian purchaser of gold finds it more profitable 
to buy drafts on London, purchase gold in the 
bullion market and ship it to India, than to purchase 
sovereigns from the Treasury at Is. 4d. ; but when 
exchange is low, the reverse is the case and it is 
cheaper to get as much gold as the Treasury will let 
you have at Is. 4d. I do not know exactly where the 
dividing line comes ; 1 but when telegraphic trans- 
fers are at Is. 4-|d. it is certainly more profitable to 
get gold bullion in London, and when they are at 
Is. 4^\-d. it may pay to get it in India. 

These considerations are modified in practice by 
the fact that many Indian purchasers of bullion 
have a preference for small gold bars which are 
manufactured in England. Thus these bars are 
worth more than an equivalent weight of sovereigns, 
and consequently importation of bullion in this 
form takes place throughout the year. But for 
many non-currency purposes sovereigns are as good 
or nearly as good as other forms of bullion, and for 
these purposes the Indian Treasury is the bullion 
dealer's cheapest source of supply when exchange 
is relatively low. Thus in the summer months the 
bullion dealers will always draw their supplies from 
the Treasury, so long as the Treasury is willing to 

1 See pp. 113-118 for an account of the cost of transporting bullion to India. 


supply them. Whenever, therefore, gold in India is 
available to the public throughout the year, the 
G-ovemment will lose during the summer months 
whatever amount the bullion dealers require. On 
every sovereign thus drawn out, the Government loses 
about l^d. For the gold could have been kept in 
England by selling bills at a rate more advantageous 
than the par of exchange by about this amount. The 
annual amount which is drawn out by bullion dealers 
when gold is available all the year round is probably not 
less than 2,000,000. Thus an important indirect 
effect of the present practice is to allow bullion 
dealers in the summer months to get their gold at 
the Government's cost slightly cheaper than they 
otherwise could. 

21. India, as we all know, already wastes far too 
high a proportion of her resources in the needless 
accumulation of the precious metals. The Govern- 
ment ought not to encourage in the slightest degree 
this ingrained fondness for handling hard gold. By 
the elimination of both precious metals, to the utmost 
extent that public opinion will permit, from amongst 
the hoards and the circulation of the country, they 
ought to counteract an uncivilised and wasteful habit. 

It is interesting to reflect that India's love of 
the precious metals, ruinous though it has been to 
her own economic development, has flourished in 
the past to the great advantage of Western nations. 
Every one knows Jevons's description of India as 


the sink of the precious metals, always ready to 

absorb the redundant bullion of the West and to 

save Europe from the more violent disturbances to 

her price level. In very recent years, while the 

South African mines have been reaching the zenith 

of their production, she has been fulfilling to 

perfection her r61e of sink. Prices have been rising, 

as it is, much faster than is healthy and in a way 

very disadvantageous to such a creditor nation 

as Great Britain, to whom large sums fixed in 

terms of gold are annually due. It is reasonable 

to think that without the assistance of the Indian 

demand, they would have risen still faster. From its 

very short period point of view the City is sometimes 

cross when this Indian demand shows itself in an 

inconvenient week ; but if we take a longer view the 

Indian demand is, at a time of plentiful gold supply 

like the present, a true friend to the City and an 

enemy of inflation. 

On the other hand, if a time comes when Indians 
learn to leave off their unfertile habits and to divert 
their hoards into the channels of productive industry 
and to the enrichment of their fields, they will have 
the money markets of the world at their mercy. A 
surfeit of gold can do at least as much damage 
as a shortage. During the past sixty years India 
is supposed to have absorbed, in addition to her 
previous accumulations, more than 300,000,000 of 
gold (apart from enormous quantities of silver). We 


may presume that., if India ceases to demand fresh 
gold and begins to disgorge some part of her huge 
stock, she will do so gradually. Yet if the change 
comes at a time of big new production, she may 
involve the world, nevertheless, in a very great 
inflation of gold prices. 

If, however, India is thus to turn the tables on 
the West, she must not delay too long. The time 
may not be far distant when Europe, having per- 
fected her mechanism of exchange on the basis of a 
gold standard, will find it possible to regulate her 
standard of value on a more rational and stable basis. 
It is not likely that we shall leave permanently the 
most intimate adjustments of our economic organism 
at the mercy of a lucky prospector, a new chemical 
process, or a change of ideas in Asia. 



1. REMITTANCE by means of what are termed Council 
Bills is a feature peculiar to the Indian system, and 
is not, so far as I know, to be paralleled elsewhere. 
It arises partly from the historical circumstance that 
the Government of India is the successor of a trading 
company, partly from the necessity under which the 
Government lies of making very large annual remit- 
tances to England. 

2. The Home Charges, that is, the payments which 
the Government of India must make in England^ for 
interest on debt, pensions, payments to the War 
Office, Government stores (not chargeable to capital), 
etc., amount to 19,000,000 or 20,000,000 annually. 
But the amount which it is necessary to remit, apart 
from extraordinary remittances to be dealt with later, 
is usually less than this ; for the amount of new capital 
raised by Government in England usually exceeds their 
capital expenditure in this country on repayments and 
on railway materials, etc. Thus the amount which it 
is necessary to remit to England annually is from 


15,000,000 to 18,000,000. Rupees to this amount, 
being part of the revenue from taxation, etc., ac- 
cumulate in the Indian Treasuries. This value is 
remitted to England by selling for sterling in London 
bills which can be cashed in rupees in Calcutta. 
Thus the Government of India pays out rupees in 
Calcutta when the bills are presented, and the 
Secretary of State's balances at the Bank of England 
are swelled by a corresponding amount. 

The Government is, therefore, one of the largest 
dealers in foreign exchange, and does for itself 
business, which Colonial Governments, for example, 
who have a certain amount of similar transactions to 
carry through (though on a far smaller scale), would 
do through a bank. But while the Government saves 
for itself the commission which it would otherwise 
have to pay to a bank, it is not, in any real sense, 
a competitor with the banks for business. In the 
first place, it sells .exchange, save in exceptional 
circumstances, in one direction only. And in the 
second place, the Secretary of State's method of selling 
exchange results in his dealing exclusively with the 
Exchange Banks and financial houses, and not directly 
with the trading public. The Secretary of State is 
in effect the ultimate source of supply for bills on 
India, and the banks, after securing what private bills 
are available, even up their demands for remittance 
to India by buying bills from him, provided he is 
selling them at a rate which makes this form of 


remittance cheaper than the alternative one of send- 
ing sovereigns. The method by which these bills are 
sold is as follows. 

3. The bills are offered in London for tender at 
the Bank of England every Wednesday morning, the 
Secretary of State for India in Council (or, for short, 
the India Council, whence the name Council Bills) 
having previously announced the amount (70 lakhs, 
say) for which tenders are invited. There is a reserve 
price (not published) below which he will not sell, 
but this reserve price is seldom operative. 1 The 
tenders name the amount tendered for and the 
number of pence per rupee which is offered. The 
total amount of 70 lakhs is then allotted to the highest 
bidders, the allotment at the minimum rate accepted 
being proportionate to the amount applied for at that 

If the demand is large and the minimum rate of 
allotment high (say Is. 4^-d.) ? the amount offered for 
tender the following week (which is announced at the 
same time as the result of the previous allotment) is 
likely to be increased. In the interval between the 
allotments on successive Wednesdays, the Secretary of 
State is usually willing to sell what are known as 
"specials" at a rate ^d. higher than the highest 
rate of allotment on the preceding Wednesday. 

4. It should be added that cash must be paid for 

1 It was operative, however, in the middle of March 1913, when the 
whole amount offered was not allotted, tenders below Is. 4d. being rejected ; 
later in the month tenders below Is. 4d. were accepted. 


the bills in London as soon as they are allotted 
on account of the time taken by the mail, they caimoE 
be changed into rupees at Calcutta for about a 
fortnight. A fortnight's interest is therefore lost, 
and it is worth paying extra to obtain what are 
called " telegraphic transfers," by means of which 
rupees can be obtained at Calcutta almost as soon as 
the sovereigns are paid into the Secretary of State's 
account at the Bank of England. 

The Secretary of State, therefore, is usually willing 
to sell telegraphic transfers at a rate ^d. per rupee 
higher than the rate for bills. 1 If the purchaser 
chooses transfers, the effect to him is that he gets 
his rupees a fortnight earlier in India and pays for 
this privilege a sum equal to 5 per cent on the money 
for a fortnight. The question, whether it is worth 
the purchaser s while to pay this extra sum, chiefly 
depends upon the Indian bank rate, because this 
governs the amount of interest which can be gained 
by having the money immediately available in India. 
It may happen, of course, that a particular bank may 
have a special urgency for funds in India, or that the 
rate for fortnightly loans does not closely agree with 
the bank rate. Generally speaking, however, if the 
purchaser can lend money out at no higher rate than 

1 The rule is supposed to be that the extra charge for transfers Is ^ 5 d. 
per rupee when the Indian, bank rate is below 9 per cent, and t \d. when it is 
9 per cent or above. The last occasions, on -which the difference of ^d. was 
in force, occurred between December 1906 and March 1907. In 1904 and 
formerly the ^ 8 d. difference came into force when the Indian bank rate ex- 
ceeded 6 per cent. 


3 per cent in India, he will certainly prefer bills ; but 
if he can lend at 7 per cent in India, it will be more 
profitable for him to buy transfers. 

Experience accords with these expectations. When 
the Indian bank rate is high and the difference of -.^<l 
between the two prices is in force, the demand is 
almost entirely for transfers. This is convenient to 
bankers, and, if he has the rupees waiting in India, 
profitable to the Secretary of State. 

5. The bills and transfers are made payable at 
the option of the purchaser at Calcutta, Bombay, or 
Madras. The amount drawn on Madras is relatively 
small, and Calcutta comes first, with about 45 per cent 
of the whole. 

6. Up to 1900 the volume of sales of Council 
Bills in any year was mainly governed by the 
amount required to defray the Home Charges, this 
amount partly depending on the volume of capital 
borrowings in the year. But the sales also fluctuated, 
though within comparatively narrow limits in most 
years, according to the Secretary of State's oppor- 
tunities (depending on the activity of business and 
the balance of trade) of selling his bills at a 
satisfactory rate. Since 1900, however, the functions 
of the Council Bill system have been enlarged, and 
it has now become a very important part of the 
general mechanism for the maintenance of the Gold 
Exchange Standard. 

7. The way in which this has arisen is easily 


explained. On account of the provision by which, 
rupees can always be obtained in India in exchange for 
sovereigns at the rate of Is. 4d. per rupee, it can never 
be worth while for the banks to buy Council Bills at 
a price which exceeds Is. 4d. by more than the cost 
of sending gold to India. This cost varies consider- 
ably from time to time, but it seldom exceeds |d. 
If, therefore, the Secretary of State refuses to sell 
bills at less than Is. 4|-d., when the banks are requir- 
ing to remit to India, gold will flow. This gold will 
be presented at the Treasuries in India to be 
exchanged for rupees or notes. Thus the only effect 
of the Secretary of State's refusing to sell remittances 
at a price which suits the banks is that sterling 
resources accumulate in his Treasuries in India instead 
of in England. This may not be convenient to him. 
For example, if the banks are sending gold to India 
on a large scale and are exchanging it for rupees, a 
time may come when this demand can only be met 
by minting more rupees ; the silver for this must be 
purchased in London and the profit on the coinage 
must be credited to the Gold Standard Reserve which, 
for reasons to be discussed in the next chapter, is 
kept for the most part in London ; thus the gold has 
eventually to be shipped back again to England to 
pay for the silver and to be credited to the Gold 
Standard Reserve. In this case a double loss is 
involved the cost of sending the gold to India (for 
the Secretary of State could probably have got 


Is. 4d. per rupee if he had sold transfers, whereas if 
gold flows he gets only Is. 4d.) and the cost of bring- 
ing it back again, say, /^d. ; thus a refusal to sell 
bills would mean an eventual loss of nearly |-cl. per 
rupee or about 1^- per cent. Or, again, the policy of 
holding some part of the gold in the Currency 
Keserve in London for possible use in emergency, 
may lead to the Secretary of State's preferring gold 
to accumulate in London rather than in India ; 
otherwise it will have to be sent back again, in 
pursuance of this policy, and a double loss incurred, 
as in the former case. Lastly, if the Secretary of 
State has considerable cash balances in India, it may 
be worth his while for a time to cash additional 
Council Bills out of these, thus in effect transferring 
his balances to London. The reasons that may make 
him inclined to do this are, first, that to increase the 
proportion of his cash balances held in sterling puts 
him in a stronger position in a case of emergency ; 
second, that selling Council Bills at a good price now 
will enable him to meet the Home Charges later on 
when he might not be able to sell his Bills at so good a 
price (in this case the transference of cash balances 
from India to London is only temporary) ; third, that 
it may put him in a stronger position for carrying out 
impending loan transactions at the most favourable 
moment; and fourth, that cash balances held in 
London can be made to earn a small rate of interest. 
All these considerations being taken into account, 


it can only be worth the Secretary of State's while to 
refuse to sell bills within the gold export price, when 
he deliberately wishes either to increase his cash 
balances in India at the expense of his balances in 
London, or to replenish that part of the gold portion 
of the Currency Eeserve which is kept in India. 

Thus he will endeavour to make as certain as 
possible of selling within the year the amount 
budgeted for (i.e., the Home Charges adjusted with 
reference to the probable capital transactions of the 
year and the state of the cash balances) ; but he will 
sell more than this if the demand for remittance is 
so great that, on his refusal to sell, the price of re- 
mittance will rise to the gold export point. In the 
words of the annual budget, " the estimate of Council 
drawings is for the amount necessary to provide for 
the Secretary of State's requirements, but additional 
bills will be sold if needed to meet the demands of 

8. Let us sum up the argument so far, and enforce 
at the same time the contention, brought up at the 
end of Chapter L, that the volume of currency 
circulating in India does not depend, as some critics 
have maintained, on the caprice of the India Office 
in the amount of Council Bills that it offers for sale. 
So far as Council Bills are sold for the ordinary 
purposes of remittance of Government funds from 
India to London, they are cashed in India out of 
the general balances of Government. But when they 


are sold in larger quantities, to obviate the necessity 
of sovereigns being sent, sufficient rupees are not 
forthcoming from this source. One expedient is to pay 
out some of the rupees in the Paper Currency Reserve 
or in the silver branch of the Gold Standard Keserve, 
and to pay an equivalent sum into the branches of 
these reserves which are held in London, " earmarked " 
at the Bank of England, 1 or in other sterling forms. 
If, on the other hand, the India Council liad refused 
to sell bills freely, gold would have been exported to 
India, taken to the Paper Currency Department, 
and exchanged for rupees in notes or silver. In either 
case there is a "similar increase in the volume of 
currency in India not held by the Government. The 
volume of currency which finds its way into circula- 
tion in India is, therefore, quite independent of the 
Secretary of State's action. Exceptional amounts of 
Council Bills are only sold when exchange has reached 
a point at which it is nearly as profitable to remit 
gold ; and if Council Bills were not sold sovereigns 
would go instead (the expense of sending them beino* 
lost), for which the Government of India would have 
>.to give rupees in exchange. This point is important, 
for it is often assumed in controversy regarding 

1 Thus a probable effect of exceptionally large sales of Council Bills is an 
earmarking of gold on Indian account at the Bank of England. The extent 
to which the Indian system can be misunderstood is well illustrated by the 
fact that in a money article recently published in an important newspaper 
m this country, an increased offering of bills by the India Council was given 
as a reason for expecting a postponement of the need for earmarking gold 
at the Bank on Indian account. 


the currency and its relation to prices that the issue of 
rupees into circulation depends in some way upon the 
amount of Council Bills sold by the Government, and 
can, therefore, be expanded or contracted by them at 
will, according to the policy of the moment. Broadly 
speaking, this is false. Even if the Government were 
to hasten the flow of rupees into circulation by selling 
an exceptional quantity of bills at a relatively low rate 
(which would be equivalent to lowering by a fraction 
of a penny the normal value of the rupee as measured 
in sterling), and were to pursue this policy over a 
long period, the permanent effect could be no more 
than in proportion to the amount by which they 
had thus lowered the par value of the rupee in terms 
of sterling. This is the amount of their conceivable 
executive power, if the Government were to exercise 
it. In fact, it has not been exercised. 

If, however, the stock of rupees in the reserves is 
running low (for a considerable quantity of rupees 
must always be kept there in order to ensure the 
ready convertibility of the notes in terms of rupees), 
and more Council Bills are sold in London than can 
be conveniently cashed in Calcutta in the above 
ways, more rupees must be issued from the Mint. 
The silver out of which they are minted is purchased 
in England out of the proceeds of selling the addi- 
tional Council Bills, and the surplus due to the fact 
that rupees are worth more than the silver they 
contain, is credited to the Gold Standard Reserve. 


According to the present practice the process in these 
circumstances also is, therefore, automatic, and the 
amount of new rupees put into circulation does not 
depend on the arbitrary action of the Secretary of 
State in selling or withholding Council Bills. If 
he did not sell bills, sovereigns would be sent to 
India, new rupees would have to be coined to meet 
the obligation under which the Government of India 
has placed itself of giving rupees in exchange for 
sovereigns on demand, and a great part of the 
sovereigns would have to be credited in some form or 
other to the Gold Standard Eeserve or shipped back 
to England again to pay for the silver. 

It is true that, if a different practice were 
adopted (a practice which was adopted in part in 
1907), and if the profits on the coinage of rupees, 
instead of being credited to the Gold Standard Reserve, 
were turned into rupees and spent by the Government 
in India on goods and services (whether for capital 
or any other purpose), more rupees would be in 
circulation for the time being than would have been 
the case otherwise. But even in this case the effect 
on the volume of circulation must be temporary, so 
long as the provisions for the maintenance of the 
rupee at Is. 4d. are in operation. For this additional 
issue of rupees would, eventually, have the effect of 
delaying additional demands for coinage in the future 
or of precipitating an occasion for the withdrawal of 
rupees from circulation. 


While, therefore, it is to a certain extent within 
the power of Government (though not at present 
according to their usual practice) to urge a certain 
number of rupees into circulation more rapidly than 
is necessary, they cannot permanently increase the 
circulation without depreciating its gold value, that 
is, they cannot permanently increase the circulation 
beyond what it would otherwise be and at the same 
time maintain the rupee at Is. 4d. It. may be added 
that a release of rupees from any other reserve, or 
even a temporary increase in the amount of capital 
funds annually raised by Government abroad for use 
in India, would have a similar effect to the release 
of rupees from the Gold Standard "Reserve. But, 
however all this might be, at present the Govern- 
ment of India do not, in fact, exert such dis- 
cretionary powers as they possess for affecting, even 
temporarily, the volume of circulation. 

9. I have said that the cost of sending gold to 
India does not generally exceed -|d. per rupee. The 
Secretary of State has, therefore, a standing notifica- 
tion (since January 1904) that he will sell bills at 
Is. 4|~d. Up to January 1900 he undertook to sell 
telegraphic transfers at Is. 4^vd. without limit of 
quantity, and since that time he has usually been 
willing to do so. 1 The cost of sending gold to India 

1 On two occasions this practice lias been suspended in January 1900, 
when the price rose to Is. 4|d., and in December 190 6 -March 19 07, when 
it rose to Is. 4-&d. The reason for the suspension in the second case was 
the operation of the rule by which the premium charged for telegraphic 



depends, however, on complex causes, varying con- 
siderably from time to time, and is often a good deal 
less than |-d. It is not easy, therefore, for the 
Secretary of State to know at exactly what price gold 
will become a serious competitor of bills as a means 
of remittance ; and not infrequently Council Bills are, 
unintentionally, at a price which makes it cheaper to 
send gold. It will be interesting to consider briefly the 
kinds of causes which influence the gold import point. 1 
10. The expense of remitting gold from one 
country to another is made up of insurance, freight, 
and loss of interest Even the first item is sometimes 
capable of variation. For example, after the recent 
robbery of sovereigns in transit from London to 
Alexandria, the ordinary rate quoted on gold, con- 
signed by the route (Bremen and Trieste) by which 
the stolen gold had been sent, was doubled, rising 
from Is. 3d. to 2s. 6d. per cent Again, on one 
recent occasion, it was stated that more gold would 
have been shipped if it had not been for the feet 
that the mail-boat was already carrying a million 
and a half sterling in gold and silver, the under- 
writers requiring a higher premium than usual if 

transfers over the rate for bills depends on the Indian bank rate (see p. 105). 
The statement made in answer to a question on this subject in the House of 
Commons (April 30 3 1912) by the Parliamentary Under- Secretary was not 
quite correct. 

1 Old-fashioned treatises on the foreign exchanges often leave the student 
with the impression that the gold import point is a known and stable thing 
given for good in books of reference, How far this is from the truth, the 
example of India well illustrates. 


they - were to insure a larger sum than this on 
a single voyage. But if it is a matter of shipping 
sovereigns from England the variations in the cost 
of insurance and freight are relatively small The 
main part of variation in the gold point arises either 
out of the possibility of getting sovereigns/rom other 
sources, or from variations in the rate of interest. 

These other sources are either sovereigns in transit 
from Australia or sovereigns ready for export from 
Egypt. As India lies between Australia and England, 
it is naturally cheaper (mainly on account of the 
smaller loss of interest) to send sovereigns from 
Australia to India than from Australia to England. 
Let us suppose that the state of the Australian 
exchanges is such that it pays to remit sovereigns 
from Australia to London anyhow, and assume, for 
the sake of simplicity (and without, in fact, any 
substantial sacrifice of truth), that the cost of freight 
and insurance from Australia to London is the same 
as from Australia to India. Now if, when the 
Australian sovereigns are off India, the bank which 
is remitting them can receive cash in London against 
their delivery in India, it will get its money at least 
a fortnight sooner, and will probably accept, therefore, 
about Is. 3f-|d. in London for Is. 4d. delivered in India 
( B \-d. being the interest on Is. 4d. for a fortnight at 
5 per cent per annum). Gold bought in this way 
for immediate delivery in India is as good as a 
telegraphic transfer, i.e., is worth ^d. per rupee more 


than Council Bills. If, therefore, Council Bills are 
at a price in excess of Is. 3|d., gold about to be 
shipped from Australia competes with them as a 
means of remittance to India. Normally, of course, 
an Australian bank is able to get more than Is. 3{-d. 
for gold delivered in India. I mean only that the 
Secretary of State cannot hope to undercut Australian 
gold, when it is available for export in large quantities, 
unless he is prepared to put down his price for 
Council Bills to this level. If, in these circum- 
stances, he wants the gold in England rather than in 
India, his cheapest course, therefore, is to buy the 
gold in transit himself for delivery in England, by 
selling for it telegraphic transfers at a suitable rate. 1 
This was done on a large scale in 1905-6 and 1906-7. 
Surplus gold from Egypt is not capable of under- 
cutting Council Bills so seriously as surplus gold from 
Australia ; for in this case it is Egypt which lies in 
between. If we assume, for the sake of precise 
illustration, 2 that the cost of sending gold from 
Egypt to London is nearly the same as that of sending 
it from Egypt to India, an Egyptian bank, about to 
ship sovereigns in any case, will take any price in 
excess of Is. 4d. 3 paid in London for the delivery 

1 It is worth his while to do this, "because the cost of sending gold from 
Australia to London in one transaction is less than the cost of sending it 
first from Australia to India and then from India to London in two separate 

2 I make this assumption, which is not exactly accurate, for purposes of 
illustration only. 

3 Or less, if paid at the time of shipment and in advance of the time of 


in India of the value in gold of a rupee. This is 
tlie extreme case. If Council Bills are at a higher 
rate than Is. 4d., say at Is. 4^d., the Alexandrian 
exchanges may be at a level which makes it profit- 
able to ship gold from Egypt to India for pay- 
ment in London, when it is not profitable to ship 
gold from Egypt to London. If we still make 
the above illustrative (but not exactly accurate) 
assumption, when Council Bills are at about Is. 4 T \-d. 
and the Alexandrian exchange on London below par, 
Egyptian gold competes with Councils as a means of 
remittance to India. Of course the supply of remit- 
tance from this source is usually somewhat limited ; 
when some Egyptian gold has flowed away to India 
under the influence of the above conditions, this is likely 
to have the effect of strengthening the Alexandrian 
exchange, and therefore, by modifying the conditions, 
of making the continuance of a flow less likely. The 
Egyptian gold is of great practical importance, 
because the busy season in Egypt comes rather earlier 
than the busy season in India, so that in the winter 
months the gold which has served the purpose of 
moving the crops in Egypt can be sent on to be 
changed into rupees which are to serve the same 
purpose in India. Of the gold, therefore, which 
flows from London to Egypt every autumn, very 
little finds its way back again to London ; what is 
not kept by the cultivators in Egypt travels on in 
due course to India. The precise moment at which 


this movement takes place and its extent depend, as 
we have seen above, on the rate at which Council 
Bills are being sold in London, and also upon 
whether the Egyptian cotton crop is dealt with late 
or early. But when towards the end of their busy 
season the Egyptian banks find themselves with more 
gold than they need, Council Bills must be sold at a 
relatively low rate if the flow of this gold to India is to 
be prevented. The dealings between the Egyptian and 
the Indian banks must thus present very delicate 
problems of arbitrage. 

It is probably within the power of the Secretary 
of State, if he wishes, to regulate the flow of gold 
direct from London to Bombay by means of the sales 
of Council Bills. But when gold is available in 
Australia or Egypt, the matter is not susceptible of 
such easy control. 

The remaining element which determines the cost 
of remittance variation in the market rate of in- 
terest has been dealt with already, ^\d. represents 
the interest on Is. 4d. for a fortnight at 5 per cent 
per annum. It is easy to calculate how the gold 
export point is affected by fluctuations in the market 
rate of discount in India on either side of 5 per cent. 

11. So far we have been dealing with the upper 
limit of exchange and with the results of a heavy 
demand for Council Bills. The effects at the lower limit 
differ in this important respect, that the Government 
are under no legal obligation to prevent the deprecia- 


tion of the rupee, and have not undertaken to give 
sovereigns for rupees in the way that they have under- 
taken to give rupees for sovereigns. There is nothing 
in law, therefore, to prevent exchange from falling 
indefinitely. There has been no change in law in this 
respect since 1895, when exchange actually did fall 
below Is. Id. The Government has, however, practic- 
ally pledged its word to do all in its power to prevent 
the depreciation of the gold value of the rupee and to 
prevent exchange from falling below the lower limit 
of Is. 3|fd. The business community would rightly 
regard it as a breach of faith if the Government were 
to permit exchange to fall below this rate, unless all 
reasonable resources had been exhausted. 

12. We now see how intimately the management of 
Council Bills and of Government remittance is bound 
up with the Gold-Exchange Standard. The disad- 
vantages from the point of view of regulating a Gold- 
Exchange Standard, which arise out of there being 
no Government bank, are partly compensated by 
the Secretary of State's being the largest dealer in 
foreign exchange. By regulating the amount of bills 
he offers for tender, he is able to regulate to a great 
extent the level of exchange. When exchange is 
falling below par he can support it by greatly restrict- 
ing his offers ; and if he cannot get at least Is. 3ffd. . 
for his bills, he withdraws from the market. In the 
meantime, of course, he has payments to make in 
England, while on the other hand rupees accumulate 


in India, as the revenue flows in and no Council 
Bills are presented for payment. If the cash balances 
in London are not sufficient to stand the drain on 
them, gold at the Bank of England may be "un- 
earmarked" and placed to the Secretary of State's 
current account, rupees in India being transferred 
at the same time from the Government balances 
to the silver portion of the Paper Currency Reserve 
the reverse process from that which has been described 
already as the result of exceptionally large nales of 
Council Bills. 

If the Secretary of State's withdrawal from the 
market and the consequent scarcity of bills on India 
is insufficient to support exchange at Is. Sjj-jd., more 
drastic measures are necessary. The method adopted 
on the last occasion of this kind was the offer by the 
Government of India in Calcutta of sterling Hits on 
London at the rate of Is. 3||d., these bills being 
cashed in London out of the Gold Standard Reserve. 
These measures were sufficient during the severe 
crisis of 1908. Their sufficiency for the future will 
be discussed in Chapter VI. in dealing with the 
Secretary of State's Reserves. 

13. If we turn from the mechanism of remittance 
to the question of Government remittance as a whole 
this can be explained most clearly by reference to a 
hypothetical India Office balance-sheet The whole 
account for the year balances out in some such manner 
as this : 



Home Charges % 

Gold " earmarked," or securities bought for Currency Reserve 

in London y 

Cost of silver + profit on coinage credited to Gold Standard 

Reserve in London z 

Expenditure on stores in London for capital purposes in India v 

Transfer of cash balances from India to London ... 10 


Council Bills cashed from balances in India . 

Council Bills cashed from rupees in Currency Reserve 

in India 

Council Bills cashed from new coinage .... 

Total Council Bills drawn 

Net capital borrowings in London 

Total receipts in London 


14. I will conclude this chapter with some statistics. 





revised estimate) 

Home Charges (net) l 





Capital expenditure in Eng- 

land on material for rail- 

ways and irrigation works 
Credited to Gold Standard 





Reserve in England 2 . 




Credited to Paper Currency 

Reserve in England 





Purchase of silver 


Addition to Cash Balances 

in England 3 . 








Council Bills and Transfers 

27,096,000 4 




Gold from India 


Net debt incurred in 

England 8 . 





Reduction of Cash Balances 

in England . 






i After deduction of curtain small sources of revenue in England and various minor 
adjustments. 2 Apart from dividends earned and reinvested in England. 

3 Excluding balances in Gold Standard Reserve. 

4 Deducting Trills on London sold in India. 

B Excluding reduction of debt by annuities and sinking funds included in Home Charges. 


The table given above analyses the Home Accounts 
in a way which brings out the essential facts more 
clearly than the Government's own published accounts. 
These actual figures may be compared with the hypo- 
thetical balance-sheet given in 13. 

The principal items of the Home Charges are 
analysed below. As these do not vary much from 
year to year it has been thought sufficient to give the 
figures of one recent year, namely, 1911-12. It will 
be seen that in that year about 5,000,000 was spent 
on pensions and leave allowances, 11,000,000 on 
debt services, and 2,250,000 on military services 
(excluding pensions). Other expenses were of a very 
small amount. 


Superannuation and pensions (Civil) 

(Military) (net) 

Furlough allowances .... 
Interest on ordinary debt .... 
Interest on railway debt and on capital deposited by 


Kailway annuities and sinking funds 
Military services (apart from pensions) . 







Revenue from interest .... 448,000 
Miscellaneous revenue .... 141,600 


The total drawings of Council Bills, the average, 
maximum and minimum rates of allotment, and the 
fluctuation between the maximum and minimum in 
recent years were as follows : 



Total Drawings 
of Council Bills. 




















































































1. THE Indian authorities have undertaken a double 
responsibility. They must be prepared to supply 
rupees in payment for Council Bills or in exchange 
for sovereigns. And on the other hand they must 
be prepared also to supply sterling or sterling drafts 
in exchange for rupees. The maintenance of the 
Indian system depends on their ability to fulfil this 
double obligation to whatever extent may be required 
of them. 

The objects to be attained are simple, but the 
methods of the Government are, largely for historical 
reasons, exceedingly complicated. I will discuss, first, 
the nature of the existing methods ; second, their 
adequacy for their purpose ; third, some proposals 
for making them more orderly and intelligible ; and 
lastly, the management of the cash balances. 

2. From the profits of rupee coinage 1 a reserve 
has been built up expressly for the purpose of sup- 

1 See p. 37 (footnote). 


porting exchange. This is known as the Gold Stand- 
ard Reserve. As the reserve is used in practice, not 
only for holding sterling reserves but also for holding 
a part of the rupee reserve, this title is a misnomer. 1 
For some years after the closing of the Mints no 
fresh .coinage was undertaken. By 1900 it had 
become necessary to mint additional rupees, and 
from that time until 1907 the profits on coinage 
rapidly raised the Gold Standard Reserve to a 
respectable total. The crisis of 1907-8 made it 
necessary to withdraw a great number of rupees from 
circulation, and no further coinage was necessary on 
a significant scale until the autumn of 1912. By 
October 1912 the aggregate profits arising from 
coinage amounted to about 18,600,000. Of this, 
however, about 1,100,000 was diverted in 1907 
for capital expenditure on railways leaving about 
17,500,000 for the Gold Standard Reserve. In 
addition to this the receipts on account of interest on 
that part which was invested amounted to about 
3,250,000, against which is to be set about 
1,000,000 depreciation in the value of the invest- 
ments in October 1912 as compared with their 
original cost. Thus at that date this reserve stood 
at about 19,750,000, allowing for depreciation. 
During the winter of 1912-13 profits on the heavy 
issues of coinage caused a further increase, and we 

1 The designation of the reserve was changed from "Gold Reserve" to 
"Gold Standard Reserve" in 1906, when it was decided to hold a part in 
silver ; but the change of title has not really made the position ranch clearer. 


may conveniently think of the Gold Standard Keserve 
as being worth about 21,000,000 net at the end of 

Of this total the greater part was held in sterling 
securities about 16,000,000 (market price). In 
recent times the policy has been followed of hold- 
ing at least half of this in securities of the most 
liquid possible type. On March 31, 1912, 4,500,000 
was held in British Treasury Bills, and 4,735,600 in 
Exchequer Bonds. Of the rest about 7,000,000 
(face value) was in Consols and other stock guaranteed 
by the British Government, and about 1,500,000 
(face value) in various Colonial Government Securities. 

Apart from the 16,000,000 thus invested, about 
1,000,000 was, at the end of 1912, lent at short 
notice in the London Money Market; about 3,750,000 
was held in India in rupees ; and 250,000 in gold 
was "earmarked" at the Bank of England. The 
holding of some part in actual gold in England 
was an innovation introduced in November 1912. 

It has been announced that the Gold Standard 
Reserve is to be allowed to accumulate through coin- 
age profits and interest receipts until it stands at 
25,000,000, and that 5,000,000 of this will be 
held in gold. 1 It is possible that when this figure has 
been reached, some part of its income may be applied 
to capital expenditure on railways. This would be a 

1 At the end of March 1913, 1,620,000 in gold stood to the credit of 
the Gold Standard Reserve in London. 


reversion to the policy of 1907-8, since abandoned, 
when one -half of the profits of coinage was thus 

The form in which the Gold Standard Reserve is 
held has been subject to much criticism. But it will 
not be useful to consider this until we are in a posi- 
tion to deal with the reserves as a whole. 

3. The second reserve is the Paper Currency 
Reserve held against the note issue. The constitu- 
tion of this has been explained in Chapter III. The 
invested portion may not exceed a stated maximum, 
of which a part only may be held in sterling securities 
and the rest must be placed in rupee securities. The 
whole of the balance must be held in gold or silver 
bullion, rupees, or sovereigns. But the gold may be 
held either in London or in India. The actual form 
in which the Currency Reserve was held at the end of 
December 1912 was approximately as follows : 

Sterling securities 2,500,000 

Kupee securities ..... 6,500,000 

Gold in London 7,250,000 

Gold in India 17,500,000 

Eupees in India 8,500,000 

Silver bullion in India or in transit . . 1,500,000 


4. The Government's remaining reserve source of 
supply of cash in the form of rupees or sterling is the 
Cash Balances. Both the total of these and the pro- 
portions held in rupees and sterling respectively vary 
within wide limits from time to time. Their total 



amount fluctuates according to the volume of taxes 
coming in at different seasons of the year, the recency 
with which loans have been contracted for capital 
expenditure, the proximity of extraordinary expendi- 
ture impending, the receipts of windfalls of income 
(as, recently, from the opium revenue), the general 
prosperity of the country, and the degree of caution 
or optimism which, in the opinion of those responsible 
for the finances, the general situation warrants. The 
proportions held in rupees and sterling respectively 
depend even more on considerations of temporary 
convenience, recent or impending capital transac- 
tions in London, the likelihood of sterling funds being 
wanted for the purchase of silver, and trade demands 
for Council Bills as a means of remittance. The 
totals of the cash balances at various dates are given 


In India. 

In London. 


March 31, 1901 








































* Excluding balances held in the Gold Standard Reserve. 

It may be added that the Indian cash balances 


are kept partly in District Treasuries all over the 
country, partly in Eeserve Treasuries, and partly 
on deposit at the Presidency Banks. The District 
Treasuries do not usually contain more resources than 
they require for ordinary transactions, and the 
balances in excess of immediate requirements, which 
are transferred to the Eeserve Treasuries, are mainly 
held in the form of notes. Thus the Government 
has no large surplus stock of rupees outside the 
Currency Eeserve. The London Balances are held 
partly at the Bank of England and partly on loan 
for short periods with certain financial houses on an 
approved list. 1 No more than a working balance 
(about 500,000) is ordinarily held at the Bank 
of England, and this has been reckoned for many 
years now (though not formerly) amongst the 
" other " deposits, not amongst the " public " deposits. 
It will be seen from the table given above that the 
London Balances fell to a low level in 1908, the 
Secretary of State making free use of them to aid him 
in supporting exchange during the critical months of 
that year. On October 30, 1908, these balances had 
sunk to 1,196,691. In 1911 and 1912, on the 
other hand, they reached a very high figure, and in 
June of both these years exceeded 19,000,000. By 
the end of 1912 they had sunk again to a more 
normal level This abnormally high level in the first 
half of 1912 gave rise to much 'criticism in regard 

1 See also pp. 190, 191, below. 


both to the amount of the balances and also to the 
method adopted of lending them out in the London 
Money Market. Something will be said about this 
in the concluding paragraphs of this chapter. 

5. We are now in a position to see exactly what 
resources in sterling and rupees respectively the 
Indian authorities have, on which to draw for the 
fulfilment of their currency obligations. Since the 
surplus balances in India, beyond those required by 
the District Treasuries and those deposited with the 
Presidency Banks, are mainly held in notes, we may 
neglect them for the present purpose. 

Rupee Reserves are held partly in the Currency 
Eeserve, partly in the Gold Standard Reserve. In 
December 1912 the amounts were approximately as 
follows : 

Currency Reserve l . . . . 10,000,000 
Gold Standard Eeserve . . . 3,750,000 


Sterling Reserves are held partly in the Currency 
Reserve, partly in the Gold Standard Reserve, and 
partly in the London Cash Balances. The forms in 
which they are held are gold (in the Currency Reserve, 
both in India and London, and to a small extent in 
the Gold Standard Reserve), money lent at short notice 
(in the Gold Standard Reserve and in the Cash 
Balances), and sterling securities (in the Currency 

1 Including silver bullion in India or in transit. 



Reserve and in the Gold Standard Reserve). In 
December 1912 the amounts were approximately as 
follows : 


Currency Keserve in India 
Currency Reserve in London , 
Gold Standard Reserve in London 

Money at Short Notice 

Gold Standard Reserve in London 
Cash Balances in London 

Sterling Securities 
Currency Reserve . 
Gold Standard Reserve 

Aggregate Sterling Resources 
Gold .... 
Money at Short Notice . 













6. Before we consider the adequacy of these 
reserves for their purposes, it will be useful to recall 
the circumstances of the two recent occasions on which 
their resources were severely taxed. The Govern- 
ment were hard pressed to supply sufficient rupees in 
1906, and hard pressed to supply sufficient sterling in 
1908. We can deal with both these occasions in a 
continuous narrative. 

The coinage of rupees recommenced on a significant 
scale in 1900. For the five years following there was 


a steady annual demand for fresh coinage (low in 
1901-2, high in 1903-4, but at no time abnormal) and 
the Mints were able to meet it with time to spare, 
though there was some slight difficulty in 1903-4. 
In 1905-6 the demand quickened, and from July 
1905, when the Government's silver reserves stood at 
what was then considered the comfortable figure of 
1837 lakhs 1 (12,250,000), it quite outstript the new 
supplies arising from the mintage of the uncoined 
silver reserve. The Government were very slow to 
buy more silver and, in fact, do not seem to have 
taken steps to do so until, in December 1905, 
their bullion reserve was quite exhausted. They 
had then to buy silver in London hurriedly and at 
rather a high price. In the meantime the rupee 
reserves had sunk to the very low figure of 761 lakhs 
(i.e., about 40% of the holdings six months earlier), and 
the demand for Council Bills in London, which would 
have to be cashed in rupees in India, showed no signs 
of abating. In order to give themselves breathing 
space, and to allow time for the silver recently bought 
in London to reach India and be coined, the Govern- 
ment had to raise the price of telegraphic transfers to 
what was then the unusually high figure of 1/4^. 
This was the worst that happened. The new coinage 
very quickly overtook and passed the demand, and by 
the end of March 1906 the available silver reserves 
were double what they had been in January. 

1 Beckoning uncoined silver at its coined value. 


This slight scare, however, was more than 
sufficient to make the Government lose their heads. 
Having once started on a career of furious coinage, 
they continued to do so with little regard to con- 
siderations of ordinary prudence though their sins 
did not overtake them immediately. Without waiting 
to see how the busy season of 1906-7 would turn 
out, they coined heavily throughout the summer 
months, and, there being more silver in hand than 
could be conveniently held in the Currency Keserve, 
it was maintained, at the expense of the sterling 
resources, in the Gold Standard Eeserve. In July 
1906 the silver reserve stood at about 3200 lakhs. 
As a matter of fact the season of 1906-7 turned out 
well, and the demand for rupees was on a large scale. 
Yet the available silver in India hardly fell below 
2000 lakhs nearly three times the minimum at the 
most critical moment of the preceding year. The 
more than adequacy of their reserve at the busiest 
moment of the very busy season 1906-7 did not 
check, however, the impetuous activity of the Mints. 
During the summer of 1907, as in the summer of 
1906, they continued to coin without waiting until 
the prosperity of the season 1907-8 was assured. 
In September 1907 their silver holdings in one form 
or another stood at the excessive figure of 3148 
lakhs. This time they got what they deserved. 
The season of 1907-8 was a failure, and at the end 
of 1907 came the crisis in America. In place of 


there being a demand for new rupees, it was 
necessary to withdraw from circulation an immense 
volume of the old ones ; and the sterling reserves, not 
the rupee reserves, were in danger of insufficiency. 
This leads us to the next chapter of the history. 

7. The coinage policy of the Government of India 
from 1905 to 1907 suggests one obvious reflection. A 
succession of years, in which there is a heavy demand 
for currency, makes it less likely that the heavy 
demand will persist in the year following. The effects 
of heavy coinage are cumulative. The Indian 
authorities do not seem to have understood this. 
They were, to all appearances, influenced by the crude 
inductive argument that, because there was a heavy 
demand in 1905-6, it was likely that there would be 
an equally heavy demand in 1906-7 ; and, when 
there actually was a heavy demand in 1906-7, that 
this made it yet more likely that there would be a 
heavy demand in 1907-8. They framed their policy, 
that is to say, as though a community consumed 
currency with the same steady appetite with which 
some communities consume beer. In so far as the new 
currency is to satisfy the demands, not of hoarding, 
but of trade, it is hardly necessary to point out the 
fallacy. Moreover, even a superficial acquaintance 
with the currency history of India brings experience 
to the support of reason. Even when the rupee was 
worth no more than its bullion value, so that it was 
hoarded and melted much more than it is now, years 


of unusually heavy coinage were nearly always 
followed by a reaction. India lias taken her coinage 
in great gulps, and it need not have been difficult to 
see that the demand of 1905-7 was one of these. 

8. The Government of India's silver policy during 
the early part of 1907 left them, therefore, in a some- 
what worse position to meet the crisis which came at 
the end of the year, than need have been the case. 
But their sterling reserves were nevertheless fairly 
high. On September 1, 1907, they seem to have 
been, approximately, as follows : 


Currency Eeserve in India 
Currency Eeserve in London 

Money at Short Notice 

Gold Standard Reserve in London 
Cash Balances in London . 

Sterling Securities 
In Currency Reserve 
In Gold Standard Reserve 

Aggregate Sterling Reserves 
Gold .... 
Money at Short Notice . 





14, 100,000 1 



, 5,200,000 



Thus, to take a round figure, the crisis found the 
Secretary of State with about 31,000,000 in hand. 

1 Book value. 


The storm was soon on him. By the end of October 
1907 it had become plain that the Indian harvest 
would be a bad one, and the financial crisis in the 
United States was fast developing. On November 4 
the Bank of England raised its rate to 6 per cent, 
and on November 7 (for the first time since 1873) to 
7 per cent. On November 6 the Secretary of State 
could only manage to sell even 30 lakhs of rupees by 
allowing the rate to drop to the minimum figure of 
Is. 3ff d. For several weeks following, at a time of year 
when the demand for Council Bills is usually strong, 
he sold none at all. But beyond withdrawing from 
the market he took no further steps for the support of 
exchange. This measure was inadequate to effect its 
purpose, and there is a good deal to be said for the 
view that he ought to have taken at once the more 
drastic steps for maintaining the gold value of the 
rupee which he had to take a few months later. 
However, it was a perplexing and unprecedented time 
for every one, and that it was some weeks before his 
advisers found their bearings is not to be wondered at. 
So inadequate was his action that at first the fall 
in exchange was scarcely stayed at all Tumbling 
day by day, it reached on November 25 the rate of 
1/3^-J, This is below the gold export point (from 
India), and it could not have fallen so low if the 
Government had made gold freely available in India. 
But, as can be seen from the preceding table, their 
Indian gold reserve was not large. Individuals were 


not permitted, therefore, to take out more than 
10,000 at a time; and in this manner the gold 
dribbled slowly away over a period of a few months. 
It would probably have been of more use if it had 
been allowed to disappear in a week at the moment 
when it was most badly wanted. 

In the meantime the Secretary of State, deprived 
of his usual source of income from the sale of Council 
Bills, was meeting his normal expenses from the gold 
portion of the Currency Eeserve in London. But the 
G-old Standard Reserve, although about 1,000,000 
worth of Consols was sold out in order to be ready 
for use in a more liquid form, was kept so far intact. 

Thus matters went on until the end of December 
1907, when the authorities nerved themselves, 
although the immediate necessity had temporarily 
disappeared through a slight strengthening of 
exchange, to take whatever drastic steps might be 
necessary to maintain the gold value of the rupee. 
It was announced that they would sell in India 
telegraphic transfers on London at a fixed rate. 
Before the need arose for acting on this announce- 
ment, it was changed into an offer to sell sterling 
bills on London at the fixed minimum rate of l/3ff . 

By March 1908 the reserves of actual gold were 
nearly exhausted, but the securities and cash at short 
notice had not yet been trenched on. Early in April 
exchange was again weak, and the offer referred to 
above came into active operation. At first 500,000 




a week, and later 1,000,000 a week of sterling bills 
on London were sold in India at l/3|f . These were 
cashed in London from the proceeds of selling securities 
from the Gold Standard Beserve. By August 1908 
about 8,000,000 of bills had been cashed in this way. 
At the beginning of September 1908 the sterling 
reserves, which I give for comparison with the 
amounts in September 1907 quoted above, were, 
approximately, as follows : 


Currency Reserve in India . 
Currency Reserve in London 

Money at Short Notice 

Gold Standard Reserve in London 
Cash Balances in London . 

Sterling Securities 
In Currency Reserve . 
In Gold Standard Reserve 

Aggregate Sterling Resources 


Money at Short Notice 
Securities . 

. 150,000 
. 1,850,000 


, 1,850,000 


. 1,300,000 
. 6,000,000 


. 2,000,000 
. 1,850,000 
. 7,300,000 


9. Thus the Secretary of State's sterling resources 
sank in the course of a year from about 31,000,000 
to about 11,000,000. But these figures do not 
supply by themselves a complete explanation of the 
manner in which he had financed himself in London 


during this period. Between September 1907 and 
September 1908 railway loans to the aggregate amount 
of about 12,500,000 and a loan of 2,000,000 for 
" general purposes" 1 were raised in sterling. 2 A 
large part of the former was required for the dis- 
charge of some previously existing railway debentures, 
and for the purchase in England of railway materials 
chargeable to capital account. In so far as the 
loan was used for these purposes it did not help 
the general position. But in so far as it was used 
for railway construction which could be paid for 
by rupees in India, it had the effect of increasing the 
Secretary of State's sterling resources by a correspond- 
ing amount. Altogether, during the period under 
review, the net assistance obtained by loans amounted, 
I think, to about 4,500,000 ; so that the total de- 
terioration in the Secretary of State's position during 
the first year of the depression was not far short of 

After October 1908 the market still showed some 
hesitation. If the season had turned out poorly, it 
is clear that the Secretary of State must have had 
recourse to borrowing on a fairly heavy scale. In fact 
the harvest was satisfactory, and by December 1908 
the demand for Council Bills was strong. It may 

1 A further loan of 2,500,000 for " general purposes" was incurred in 
December 1908. 

a An unfunded debt of 6,000,000, which, has been wiped off lately out of 
the proceeds of the opium windfall, was incurred by the issue of India 
Bills during this period. 


be added to complete the story, that in August and 
September 1909 there was a short period of weak- 
ness when it was again necessary to offer sterling 
bills in Calcutta. Since that time India has enjoyed 
a period of very great prosperity, and, so far from the 
reserves being tested, it has been possible to build up 
the very strong position analysed above. 

10. I have looked at the crisis so far from the 
point of view of its effect in depleting the sterling 
resources of the Secretary of State. To the authorities 
in India it presented its other face. There it was a 
question of how many rupees they would be able to 
withdraw from circulation. Unless there is a de- 
ficiency in the revenue from taxation, and apart from 
loans, the extent to which the Secretary of State can 
draw on sterling resources must exactly equal the 
extent to which the Government of India can with- 
draw rupees from circulation. For every transfer 
from the sterling branch of any of the reserves must 
be balanced by a corresponding transfer into the 
rupee branch. The amount of the sterling reserves 
is a measure of the ability of the authorities to with- 
draw rupees; and conversely, the volume of rupees 
which can be spared from the circulation (or from 
hoards) in bad times sets an upper limit to the 
extent to which they can be compelled to draw on 
their sterling reserves for the support of the currency. 

Eegarded from this standpoint, the facts were as 
follows : By March 1908 nearly 115 million rupees 


had been withdrawn into the currency reserve by the 
release of gold, and by December 1908 the figure had 
risen to 154 million. Up to March 1908 it had not 
been necessary to take rupees into the Gold Standard 
Reserve ; but by the end of November 1908 about 
130 million rupees had been withdrawn in this way. 
There was also a small increase of rupees in that part 
of the Indian Cash Balances which is held in rupees 
and not in currency notes. Thus the active circula- 
tion was reduced altogether by about 285 million 
rupees (19,000,000). This figure agrees closely 
enough with the figures we reached by studying the 
state of the sterling resources. 

11. This completes the narrative of events up to 
the end of the crisis of 1908. I have given only 
such details as are relevant to my main topic the 
adequacy of the reserves to fulfil their purpose. 

12. Let us consider, first, the adequacy of the 
reserve of coined rupees. The governing facts of the 
situation are that every addition to the rupee reserve 
diminishes to an equivalent extent the amount avail- 
able for the sterling reserve ; that if the rupee reserve 
is insufficient, nothing worse can happen than some 
delay and inconvenience to merchants at a time of 
boom, whereas, if the sterling reserve is insufficient, a 
dangerous crisis may be aggravated to the pitch of 
panic ; that at the last moment the rupee reserve can 
always be replenished with no very great delay from 
the resources of the sterling reserve, whereas the 


reverse is not the case (the silver being not so 
saleable at a crisis as the gold is in a boom); and 
that, therefore, it is desirable to keep the rupee 
reserve at the lowest possible point consistent with 
probability and ordinary prudence. The practical 
information chiefly required for settling the proper 
policy is in regard to the ease with which new rupees 
can be supplied as they are wanted as to how far, 
that is to say, the Government can safely pursue the 
policy of living from hand to mouth. This depends 
upon how fast silver can be bought by the Govern- 
ment without its submitting to extravagant charges, 
and how fast, in relation to the maximum rates of 
new demand so far experienced, the Indian Mints 
can turn the silver into rupees. 

13. The Government of India's recent attempt 
to solve the first part of the problem unhappily 
involved its officers in a good deal of obloquy. The 
silver market is a very narrow one and can only be 
dealt in through the agency of one or other of a very 
small number of brokers. A ring of speculators lay 
waiting to force prices up as soon as the Government 
should appear as a buyer. Apart from the brokers 
who acted for the ring, there was only one firm in a 
position to buy large quantities of silver with the 
secrecy which was necessary if the speculators were 
to be defeated. Unfortunately the head of this firm 
was closely related by blood to the Parliamentary 
Under-Secretary of State. Two courses were open : 


to buy openly and pay such extra price as the 
speculators might find themselves in a position to 
demand, or to risk charges of venality from any 
one who might have an interest in discrediting 
the Government disappointed speculators, currency 
malcontents, or members of the political party in 
opposition. The officials, thinking (bureaucratically) 
more of the Indian Exchequer and the Indian tax- 
payer than of the House of Commons, chose, in fact, 
the second of the two alternatives in a spirit, per- 
haps, of too great innocence, bred of long immunity 
from charges of personal corruption. It turned out 
that they had made insufficient allowance for the 
deep interest which the House of Commons takes in 
suggestions of personal scandal. The question of 
Indian currency became almost interesting. Members 
asked one another what the Gold Standard Reserve 
might be, and, when writers in the Press told them, 
were duly horrified to learn that it contained no 
gold. Closer inquiry elicited further facts unsuspected 
hitherto. It was discovered that a number of the most 
prominent members of the London Money Market 
were Jews, and that the Government of India's hold- 
ings of Consols had depreciated in market value since 
they were bought. But attention was specially con- 
centrated on the fact that the cash balances held in 
London, after fluctuating considerably from time to 
time, had risen for a year past to an unusually high 
level, and had been lent out at low rates of interest 


to persons many of whom bore foreign names. How 
was the ordinary member of Parliament to be sure 
that some cosmopolitan syndicate of Jews was not 
fattening at the expense of the ryots of India, 
whose trustee he had often declared himself to be ? 
Indian currency is too complicated a subject to be 
mastered at a moment's notice ; and many persons, 
without paying much attention to random charges 
of corruption, felt, quite legitimately, that there was 
a great deal going on of which they had no concep- 
tion, and that they would like to be fully satisfied 
for themselves, and not merely on the word of the 
officials, that everything was really in order. The 
situation in its fundamentals has arisen before, and 
will arise from time to time in the future so long 
as the relations of the House of Commons to India 
combine in a high degree responsibility and ignorance. 
14. The circumstances themselves are of very 
transient importance, but they are likely to have 
some permanent effect on the particular question 
which we are now discussing. It will be too much 
to expect the officials to expose their personal re- 
putations again to a suspicion, however ill-founded, 
even in the interests of the Indian Exchequer. Next 
time that the Government of India have to buy 
silver on a large scale, it is likely that they will do 
so publicly and pay such extra price as this policy 
involves. It is not worth a Government's while 
to risk its transactions falling into suspicion in 


order to save half a million pounds. Assuming, 
therefore, that in future the Government will have 
to buy publicly, we have to consider whether it 
is likely to be cheaper for them to buy when the 
price of silver seems low, and hold stocks in hand, 
or to wait until the last moment and buy at what- 
ever price is then ruling. I am inclined to think 
that the second of these two policies is the better 
though it is plainly a matter on which it is not 
possible at present to see one's way clearly. It 
is outside the ordinary run of Government officials' 
duties to judge whether or not a given time is a good 
one at which to buy silver. The speculative business 
of estimating the future of silver is best left to 
experts in the matter, even though the price ulti- 
mately paid has to include some commission to them 
for their services or their foresight. In the second 
place the history of the recent speculative ring in 
silver, so far as it can be known to an outsider, does 
not suggest that such a transaction is a very easy 
or profitable thing to carry through, or that the 
speculators have had a sufficiently striking success 
to encourage similar attempts on a large scale in the 
future. I do not know with what profit the ring 
have emerged from the transaction ; but the expense 
of carrying silver for a long period is great, and the 
rise in its price in the last two years, though sub- 
stantial, has not been enough so far as one can judge 
to leave a surplus of profits at all commensurate 


with the grea-t risks run. In the third place, it does 
not seem certain that the urgent demands for fresh 
coinage of rupees, to which India is subject from time 
to time, will be as frequent in the future as they have 
been in the immediate past. On the one hand the heavy 
coinages since 1900 are cumulative in their effect and 
render further coinages in the future less probable ; 
and on the other hand an increased use (it is to be 
hoped) of other media of exchange will allow an urgent 
demand for currency to be met in other ways. 

15. I do not think, therefore, that the Government 
need show a very long foresight lest they should have 
to buy silver dear. But when their stocks are falling 
low and there are apparently signs of demand in the 
immediate future, how long can coinage be delayed 
safely ? To answer this we need to know the maximum 
rate of output of the Mints, and the maximum rate 
of absorption of new currency so far experienced. 

16. The rates of absorption of rupees in various 
years have been given in the Table on p. 55. The 
maximum absorption in the October to December 
quarter was 11*39 lakhs in 1905-6, and the maximum 
in the January to March quarter was 2*68 lakhs in 
1909-10. It has been estimated that the Indian 
Mints can turn out 2*25 lakhs of rupees per month 
without overtime, and 4*50 lakhs per month with 
overtime. There seems little reason, therefore, for 
over-anxiety lest the Government be caught short 
of rupees. If they were to start the busy season 


with a surplus of 500 or 600 lakhs over what 
was considered a safe minimum,, the reasonable g 
demands of prudence would have been fully satisfied. 
The safe minimum in question must necessarily depend 
on circumstances, especially on the volume of the note 
issue and on the amount of gold held in India ; it is 
impossible to suggest any figure which would be 
permanently suitable. I am dealing merely with the 
surplus over this minimum which, on the basis of 
experience, the Government might reasonably take 
pains to have in stock at the beginning of a busy 
season. The calculation refers throughout to their 
aggregate rupee resources in the Currency Reserve 
and Gold Standard Reserve combined. 

17. We now come to the much more important 
question of the adequacy of the sterling reserves. 

I do not think it has ever been thought out quite 
clearly for what precise purposes these reserves are 
held . The difficulty can be put shortly in this question, 
Are they held purely as a currency reserve, or are 
they to fulfil also the purpose of a banking reserve ? Is 
their only purpose, that is to say, to make certain that 
the Government will always be able to exchange for 
sterling such rupees and notes as may be presented to 
them, or are they also intended to ensure India's being 
able to meet her international obligations at a time of 
dangerous crisis ? The two purposes are plainly not 
identical If all bankers and merchants keep adequate 
reserves in rupees and notes, then it will be sufficient 


if the Government are always able to turn, these rupees 
and notes into sterling. But if in a financial crisis 
the Indian Money Market as a whole is in fact 
unable to meet its international obligations without 
Government assistance, is it the Government's in- 
tention to stand calmly aside and permit (for 
example) a suspension of cash payments by the 
three Presidency Banks, or will they, if necessary, 
use their sterling reserves to give some support to 
the Indian Money Market in extremis ? 

If the Government's Reserve is held purely to 
support the currency, then the maximum volume of 
rupees and notes, which could, so far as one can 
anticipate, be spared from the circulation and 
tendered to the Government for exchange, sets an 
upper limit to the necessary amount of this Eeserve. 
If, on the other hand, it is intended to act as a 
banking reserve and to ensure India's ability to meet 
her international obligations at all times, then its 
upper limit is set by the probable maximum amount 
of the adverse balance which could arise against 
India for immediate payment. 

18. I will begin by discussing this question on 
the first hypothesis that what the Government has 
been accumulating is intended to serve as a currency 
reserve only and will return later to the problem 
of a reserve held for wider purposes, and of the 
possible magnitude of the balance of international 
indebtedness against India. 


19. To estimate the demand that the reserves 
might have to meet merely in order to support the 
currency, the existing volume of currency is what we 
chiefly require to know. For this sets, or suggests, a 
limit to the maximum amount which can possibly be 
spared from the active circulation. 

Attempts to estimate the rupee circulation of India 
have been the occasion of some very interesting calcu- 
lations. For many years past (since 1875) an annual 
census of rupees has been taken by examining in each 
Government Treasury a bag containing 2000. This 
enabled Mr. F. C. Harrison, when he was Comptroller 
of Currency, to apply the Jevonian method very fully ; 
and he was also able to corroborate his estimates by 
reference to the numbers of the older issues, 1835 and 
1840 (e.g.), actually withdrawn from circulation on 
the occasions when the Mint recalled them. Mr. 
Harrison's results were checked by the labours of a 
later Comptroller of Currency, Mr. Adie, who applied to 
the same material two alternative methods of much 
greater technical complexity than Mr. Harrison's. 1 

Jevons's method is based on the assumptions that 
the proportions of coins issued at different dates 
found in the given samples roughly correspond to 
their proportions in the circulation at large, and that 
the numbers in circulation of the latest issues do not 

1 For details of the method applied in these various investigations see 
Appendices to Reports of Head Commissioner of Paper Currency, 1894, 1895, 
1896, 1897, and 1900. See also Mr. Harrison's article on the c ' Rupee Census " 
in the Economic Journal for 1891. 


much, differ from the numbers issued from the Mint. 
In short, if we know the relative proportions of coins 
of 1860 and of 1912 in the circulation, and if we 
know, approximately, the absolute number of coins 
of 1912, we can calculate the absolute number still 
circulating of the coins of 1860. In applying this 
method to the Indian data, we are assuming that the 
proportions of rupees of each date found in the bags 
examined in a great number of scattered Government 
Treasuries are a fair sample of the proportions still in 
circulation throughout the country. In a country 
such as India, however, there may be great stagnancy 
in a part of the circulation, and the coins finding 
their way to the Government Treasuries may be a 
sample rather of the floating surplus of coinage, 
which has a relatively high velocity of circulation, 
than of the total stock, which includes semi-hoards 
passing from hand to hand comparatively seldom. 
Since these samples are likely, therefore, to contain 
an undue proportion of recent issues, estimates of the 
total circulation, which are based on them, may be 
expected to fall short of the truth rather than to 
exceed it. There is reason, also, for supposing that 
in some cases the officials charged with the duty of 
examining the samples did not always deal with them 
conscientiously. A tendency was noticed for the 
returns of one year to resemble those of the previous 
year more closely than they should, and not infre- 
quently a batch of coins would be attributed to a 


year in which it is known that none were minted. 
Nevertheless the calculations of Mr. Harrison and 
Mr. Adie, and the data on which they are based, 
seem on the whole coherent, and bear, so far as one 
can judge, the marks of substantial accuracy. 

A quite different method of estimating the circula- 
tion has been adopted by Mr. F. J. Atkinson. 1 His 
method is direct; and consists in a calculation or 
estimate of the additions to the currency and the 
losses from export, melting, etc., year by year, from 
1831 when the modern coinage first began. Some 
of the items in the calculation are definitely known, 
but others, the amount annually melted, for example, 
are almost entirely a matter of guesswork. The fact 
that his calculations contain altogether a great 
number of separate guesses does not prevent his 
final result from being a guess too. For the period 
previous to the closing of the Mints some of his 
estimates for the amount melted seem very low, and 
this may possibly explain why his final results yield 
a much higher total for the circulation than those of 
Mr. Harrison and Mr. Adie. In recent times, i.e. 
since the closing of the Mints, and specially since the 
new equilibrium which was reached in 1900, Mr. 
Atkinson's method is much more satisfactory than for 
earlier years and, since the doubtful items are in 
these later years a far smaller proportion of the whole, 
much less likely to lead us wrong. For the earlier 

1 Stat. Journ. March 1897 and March 1903. 


years, therefore, I am inclined to prefer Mr. Harrison's 
conclusions; but I think they can be brought up 
to date by a year-to-year method resembling Mr. 
Atkinson's. The increase in Mr. Atkinson's estimate 
during the 'nineties is due to the fact that, as his 
figures purport to exclude rupees in hoards, he must 
make large allowance for the coins from this source 
then entering into circulation. 

The actual figures are as follows : 



1st method 

2nd method. 

Atkinson, i 
















X 115 











































































i Of Mr. Atkinson's two separate calculations, made in 189T and 1903, I have taken 
the latter. His calculation explicitly excludes rupees in hoards, currency reserves, and 
Government balances ; and is not, therefore, entirely comparable with the others. If it 
were, the excess would be considerably greater than it actually appears above. 


20. These are the data. It is very difficult to 
estimate the extent to which rupees may have 
emerged from hoards during the period which suc- 
ceeded the closing of the Mints. Mr. Atkinson's 
figures suggest that rupees from this source not only 
made good the natural wastage in the active cir- 
culation but actually brought about a large increase 
in it. Judging from the course of prices, I think he 
must have made an excessive allowance under this 
head. The figures of Mr. Harrison and Mr. A die, on 
the other hand (which refer to the total circulation), 
point to a more moderate influx out of hoards into 
current use. I propose to take a middle course, 
nearer, however, to Mr. Harrison than to Mr. Atkin- 
son, and to assume a public circulation in 1900 (i.e., 
excluding rupees in the Currency Reserve and 
Government Balances) of 120 crores of rupees. 
This estimate is probably near enough to the truth 
for our purpose. If it is incorrect, I think it is more 
likely to be an underestimate than an overestimate. 

Starting from this assumption, I have worked out 
the details given in the following table as a guide to 
the probable circulation at the present time. By 
public circulation, whether of rupees or notes, I mean 
the whole circulation not in the hands of the Govern- 
ment i.e., including that in the hands of the banks. 
I am primarily concerned with the circulation of 
rupees ; but the public circulation of notes has been 
added in the last column but one, as it is useful to 



know at the same time the total public circulation of 







Public Cir- 

New Coin- 



Public Cir- 



culation of 

age less 

Gold Ex- 

Net 3 


culation of 

in the hands 

April 1- 
March 81. 

Rupees on 
April 1. 

age,i etc.2 



of Rupees on 
March 31.4 

Notes on 
March 31. 

of the 
Public on 


March 31.* 




+ 13,60 

- 4,66 

- 35 

= 128,59 

+ 23,79 




+ 2,04 

- 2,72 

- 1,42 


+ 24,24 

= 150,73 



-f 60 

- 58 

- 2,23 






+ 11,42 

- 45 

+ 40 

= 135,65 

+ 31,54 

= 167,19 



+ 6,88 

+ 55 

- 61 

= 142,47 

+ 33,73 




+ 16,11 

- 2,11 

- 78 

= 155,69 

+ 37,90 

= 193,59 



+ 22,88 

- 4,88 

- 1,28 

= 172,41 

+ 41,20 

= 213,61 



+ 15,48 


- 41 

= 175,92 

+ 38,65 




+ 2 


- 29 

= 160,75 

+ 39,23 

= 199,98 



+ 8 

+ 13,14 

- 1,39 

= 172,42 

+ 46,51 

= 218,93 



- 42 

+ 3,76 

- 1,72 

= 174,04 

+ 45,68 

= 219,72 




+ 11,61 

- 1,18 

= 184,41 

+ 53,24 

= 237,65 



1 This column is derived from the figures given by the Currency Department, and the 
total of net coinage issued in individual years differs somewhat from the total amount 
minted as stated in the Mint Statistics. 

2 In one or two of the earlier years deduction is made on account of an appreciable sum 
in rupees paid out to native states. This deduction is in accordance with the practice of 
the reports of the Currency Department. 

3 For Bahrein Islands, Ceylon, Arabia, Mauritius, and Bast African Coast. 
* Not allowing for natural wastage of rupees (see below). 

This calculation makes no allowance for the general 
wastage through loss and various causes, or for the 
steady drain of rupees across the land frontiers. 
This last item is probably considerable and is not 
adequately accounted for in the trade returns. The 
recorded statistics of trade overland show a large 
annual balance against India, which is probably met 
by an unrecorded export of gold, silver bullion, and 
rupees. In the case of Nepal, for example, the 


recorded statistics show a considerable net balance of 
imports of treasure into India ; and in the case of 
Tibet, Afghanistan and, in fact, all the land frontiers, 
the official statistics of the export of treasure do not 
tally with what we know of the circulation of the 
rupee beyond the frontiers. Taking all these causes 
of loss together, I do not think we should overestimate 
the wastage of rupees from the circulation in placing 
it between half a crore and a crore annually. For the 
twelve years 1900 to 1912, therefore, I propose to 
make an aggregate deduction of 941 lakhs. 

This leaves us with a public circulation of 175 crores 
of rupees (116,500,000) on March 31, 1912, and a 
total public circulation, including notes, of 228 crores 1 
(152,000,000), being an increase since 1900 of 46 
per cent in the rupee circulation and of 58 per cent 
in the total circulation. If Mr. Atkinson's estimate 
of the circulation in 1900 is nearer the truth than Mr. 
Harrison's, then the public rupee circulation in 1912 
may have been as much as 200 crores. In the course 
of 1912 there was a good deal of fresh coinage, of 
which, at the time of writing, accurate statistics are 
not yet available. For our present purpose it will 
be quite sufficiently cautious to think of the public 
rupee and note circulation together as amounting to 
not more than 250 crores. 

21. How much of this could possibly be spared 
from circulation at a time of crisis? In 1908 the 

1 This represents a per capita circulation of between Rs. 7 and Rs. 8. 


rupee circulation fell (at its lowest point) by some- 
what less than 30 crores, or less than 20 per cent of 
the estimated rupee circulation at that time. The 
note circulation (see p. 55) fell much less seriously. 
It does not seem to me likely that the Government 
could be called on at the present time to redeem 
more than 25 per cent of the total circulation (notes 
and rupees together), or, on the basis of the foregoing 
calculations, 60 crores (say) of rupees (40,000,000). 
If the Government were to keep in one way or another 
a reserve of this amount for purely currency purposes, 
I think they would have done as much as reasonable 
prudence could require. I do not say that it is im- 
possible that they should be called on to redeem a 
greater amount than this. But it would be ex- 
travagant to maintain a reserve adequate for all 
conceivable emergencies, since there is a further resort 
of which use might fairly be made without great 
reluctance. Unless the London Money Market has 
collapsed as well as the Indian, it is always open to 
the Secretary of State to borrow by means of India 
Bills. There would be nothing shameful in this 
though possibly some expense. But the expense, 
even if the Secretary of State had to pay a rate of 
interest appropriate to Turkey or China, would be 
much less than the expense of maintaining a very 
great reserve against unlikely emergencies. 1 

1 In 1899, the Government of India contemplated the possibility of a loan. 
See their despatch of August 24, 1899 (H. of C. 495 of 1913, p. 13) : " If 
India were afflicted with famine or other adverse circumstances in the earlier 


22. So much for the proper magnitude of the Re- 
serve, regarded as a Currency Reserve. The question 
of its use as a Banking Reserve raises two problems 
a problem of policy and a problem of statistics. 
Ought the Government to allow its Reserve to be 
used as a Banking Reserve ? If so, how large ought 
this Reserve to be ? Let us consider policy first. 

23. There are three kinds of crises by which the 
Indian Money Market might be assailed a purely 
internal crisis, in which the banks have difficulty in 
meeting a run on them by their Indian depositors ; 
a purely external crisis, in which India owes, and is 
called on to pay, large sums in the London Market, 
but is free from serious banking trouble at home; 
and a general crisis, in which the features of an 
internal and an external crisis are combined. 

A purely internal crisis of the first kind might 
require assistance from the resources of Government, 
but would involve no claims on their sterling re- 
sources specifically, as distinguished from their rupee 
resources. The trouble would probably begin with 
a boom of the usual type, heavy commitments on 
the part of the banks, large importations of foreign 
goods, and (in the future) a good deal of internal 

years of our new currency, and before an adequate reserve had accumulated, 
circumstances might arise in which borrowing to maintain the standard 
would become an absolute necessity. We should hare preferred to have been 
armed against such a contingency . . . not by actual borrowing but by 
obtaining power to borrow. . . . We have learnt with satisfaction . . . that 
your lordship has stated in the House of Commons that borrowing would be 
resorted to if it should prove to be necessary." 


company promoting. If, early in the autumn, a 
serious failure of the monsoon became apparent, a 
widespread suspension on the part of the numerous 
bubble banks, which have been springing up lately 
all over India, 1 would be a probable consequence. 
Indian depositors generally might take alarm and 
hoard money in their own houses on a large scale. 
Exchange Banks have such large deposits in India 
and so little cash there 2 that they would probably 
require to import funds from London as fast as 
possible. The Indian Joint Stock Banks, however, 
are now so important that the part played by the 
Exchange Banks might not be adequate to save the 
situation. The Government would then be called on 
to make advances to the Presidency Banks. This 
has happened from time to time in the past, the last 
occasion being in April 1898, when the Bank of 
Bombay, whose bank rate was then at 13 per cent, 
asked the Government for an advance of 25 lakhs. 3 

This raises the first question of policy whether 
the Government should help the bankers' reserves 
on an occasion of internal crisis by making rupee 
advances to them. But it is hardly relevant to the 
question of the Government's sterling resources ; 
and, unless the Government Savings Banks were to 
be in trouble at the same time, it is not likely that 

1 See Chap. VII. 2 See p> 215< 

3 The Government was on the point of sanctioning this advance when the 
urgent necessity for it came to an end, and the advance was not actually 



there would be any difficulty in helping the bankers, 
if it were thought right to do so. 

A crisis of the second kind, due to general de- 
pression or bad harvests, in which India has to meet 
a heavy adverse balance in London, provided that, 
as in 1907, it is not accompanied by internal banking 
difficulties of the kind just described, causes, it is 
true, a drain on the Government's sterling resources 
through the necessity of providing remittance on 
London, but only in proportion to the volume of notes 
and rupees which are brought to the Government for 
encashment or in payment of sterling drafts. 

At first, therefore, in such a case, there is no 
question of the Government's using its reserves 
otherwise than as currency reserves ; and the banks 
will have plenty of notes and rupees with which to 
buy the Government's sterling drafts. Only if the 
depression is very prolonged, and one bad harvest 
follows another, is the need likely to arise for 
sterling advances from Government, otherwise than 
against a corresponding face value of notes and 

It is not very improbable, however, that in the 
future there might be a general crisis of the third 
kind a heavy adverse balance against India, and an 
internal banking crisis at the same time. It is in 
these circumstances that the most difficult question 
of policy arises. The Indian Money Market would 
need to remit funds to London, but, on account 


of the internal banking crisis and an outbreak of 
hoarding amongst depositors, would not have even 
rupee resources with which to do it. Consequently 
the Government's offer to sell sterling drafts in 
Calcutta, or to release gold from the Currency 
Eeserve would not meet the case. If general distrust 
of banking was widely spread, and notes, gold, and 
rupees were being hoarded in the old-fashioned way 
on a large scale, the banks would not be able to 
put their hands on sufficient cash resources of any 
kind to enable them to pay for the Government's 
drafts on a scale adequate to their necessities. 
The position would be that the Indian Money 
Market was on the verge of general insolvency with 
the Presidency Bank Eates at (say) 12 per cent, and 
that the Indian Government had (say) 40,000,000 
sterling resources in hand with demands on only a 
modest scale for the encashment of notes and rupees. 
The Government would be vehemently urged to save 
the situation by making sterling advances, not simply 
in exchange for notes or rupees, but on some other 
non-monetary security. 

24. We now have the possibilities before us. If 
in any of these sets of circumstances the Govern- 
ment were faced with demands for advances either in 
rupees or sterling, what line would it be proper to 

On the one hand the policy of advances may 
introduce into the Indian Money Market a serious 


element of weakness, an element, perhaps, insepar- 
able from a system where there is no central banking 
authority and where the currency authority stands, 
normally, outside the money market. It is not the 
business of the Government to hold any of the reserves 
which the bankers ought to hold. But if the Govern- 
ment does, in fact, for another purpose hold large 
reserves in its hands, and if it is believed that it will 
in case of extreme necessity come to the market's 
rescue, the bankers may tend to keep somewhat 
lower reserves than they ought, and than they other- 
wise would. We have over again the situation which 
has long existed, to its detriment, in the United 
States. There, as in India, the Government, with 
immense currency reserves of gold, is normally aloof 
from the money market. There also they have no 
central banking authority. The expectation that 
the Government will bring some of its gold to the 
rescue in extreme circumstances, has always been 
said to exert an enervating influence on the banks 
themselves in the matter of the precautions they 
take for times of crisis. The ultimate solution prob- 
ably lies in the establishment of a Central Bank for 
India which shall be the Government Bank and shall 
hold the banking and currency reserves at the same 
time. 1 

In the meantime, in spite of this consideration, 
the Government will not, I think, be able to resist 

1 I will recur to this proposal in Chapter VII. 



the pressure on them in a crisis to come to the 
assistance of the market. Indeed, I do not know 
that they ought to resist it. It would be absurd to 
have large reserves in hand, and not to use them to 
avert a general calamity. The awkwardness of the 
situation is intrinsic, and cannot be avoided so long 
as the present divorce is maintained between the 
banking and the currency authorities. The plans 
of the Government ought, therefore, to be laid 

25. If there is force in this contention, and unless 
the Government of India have definitely made up their 
minds that their sterling reserves are to be used in 
no circumstances except for the support of exchange 
and of the sterling value of their currency, it is 
important to understand that immediate action is 
essential, and that to delay action for a few weeks 
may be fatal. I would emphatically apply to India 
the well-known doctrine which the powerful advocacy 
of Mr. Bagehot raised in England, many years ago, 
to an impregnable position in the unwritten constitu- 
tion of this country the doctrine, namely, that in 
a time of panic the reserves of the Bank of England 
must, at a suitably high rate, be placed at the 
disposal of the public without stint and without 
delay. There is a danger that the matter may not be 
thought out until, quite suddenly, the financial crisis 
comes, and that then, while the decision is being 
taken and the best advice sought, an inadvertent 


delay will intervene. If there were signs of a general 
banking crisis in India, and particularly if the position 
of the Exchange Banks were weakening in England, 
I am inclined to think that it would be a wise policy 
on the part of Government to make an immediate 
announcement that they would place up to (say) 
10,000,000 at the disposal of the Presidency Banks 
(or other approved borrowers) at a rate of (say) 
10 per cent. If this action stayed, as it well might, 
the run. on the banks in India, and the difficulties of 
the Exchange Banks in raising temporary loans in 
London, the Government might with a very moderate 
loss of funds (the mere announcement that they were 
available being sufficient) find itself in a far more 
favourable position for dealing with the subsequent 
depression ; whereas after a delay a similar announce- 
ment might eventually be forced upon them, and if 
the panic had then gained impetus, the 10,000,000 
quickly lapt up. 

26. Two points connected with the above may be 
emphasised before we pass on to the statistical problem. 
In the first place, in the event of a financial crisis, 
accompanied by numerous bank failures, I do not 
think it likely that the Government would be over- 
whelmed with demands for the encashment in sterling 
of notes and rupees. It would be much more in 
accordance with what we know of similar crises else- 
where to expect hoarding on a large scale, rather than 
a diminished demand for currency and an ability to 


export it. In this matter the experience of 1907-8, 
when the monetary position in India was easy through- 
out, may prove, I think, misleading. During the 
eventful weeks in November 1907, when the Bank of 
England rate stood at 7 per cent, the Bank of Bengal 
rate did not rise above 6 per cent. 1 No tendency 
whatever was apparent for there to be withdrawals of 
money from the banks in India, or for hoarding to 
reassert itself amongst the class which is learning to 
bank. On the other hand, the comparative failure of 
the crops left financiers with considerable rupee funds 
in their hands which they could not use. The banks 
had, therefore, no special difficulty in putting their 
hands on rupees and notes, and the only problem was 
for the Government to turn these into sterling. The 
easiness of the internal money market at that time 
and the total absence of banking trouble have pro- 
duced the impression that there will be plenty of 
rupee funds available at a crisis, and that the only 
question will be as to whether the Government can 
turn these into sterling. The great development of 
Indian Joint Stock Banking since that time on not 
perfectly sound lines makes it doubtful whether bank 
troubles will be absent in an equal degree on the next 
occasion of difficulty. 

1 For the movements of the Indian bank-rate in the autumn and spring of 
1907-8, see the chart appended to Chap. VIII. Eventually, on January 16, 
1908, the Bengal rate did rise to 9 per cent (the Bombay rate did not rise to 
this level until February 7} ; but this is not very abnormal in the winter, 
and the average rate for money in 1907-8 was lower than in the correspond- 
ing season of the two busy years 1905-6 and 1906-7. 


There is no one now living in England within 
whose memory hoarding has been a normal thing. But 
in countries where the tradition is but lately dead or 
still lingers, it is apt to revive with astonishing 
vitality at the least sign of danger. The extent to 
which the people resorted to hoarding in France, 
Germany, and Austria (especially in the latter country) 
during the Balkan War was very remarkable, and has 
exhibited a danger to which the banking systems of 
those countries are still subject, although some had 
begun to forget it. If this is the case in European 
countries, there cannot be much doubt as to what 
would happen in India. Some banking failures, a 
hint of political trouble, and the old habits will 
come back, whatever progress banking may seem to 
have made in a time of prosperity. 

But, secondly, assuming a sharp financial crisis to 
be accompanied by increased hoarding, it would plainly 
be better if it were a hoarding of rupees and notes 
rather than of gold. It is not impossible that this 
might be the case. A trust in the Government's 
capacity to meet its obligations will persist some time 
after all confidence in private institutions has been 
dissolved. In Austria, for example, the hoarding was 
not so much of gold or silver as of notes. I believe 
that in some parts of India, especially in those where 
gold has made relatively little progress, hoards are 
sometimes held already to a fair extent in notes. I 
know, for example, a very conservative Brahmin family, 


small landowners in Eastern Bengal, where this is the 
case. Once a week the head of the family will retire 
privately to a corner of the roof of the house, take 
out the little hoard of notes with ritual care, count and 
check them, dust each with a feather brush, and lay 
them out in the sun to air and to recover from any 
trace of damp. If a note shows signs of age or wear, 
it is taken to the nearest currency office and changed 
for a new one. In troubled times such a family would 
hoard more notes or silver, not gold. This, however, 
is no more than an illustration of the point I have 
already dwelt on and emphasised the manner in 
which any increase in the popularity of gold diminishes 
the stability of the currency. 

27. Returning from these digressions, I conclude 
that the Government will not be able in practice to 
restrict its responsibility to the currency, and may 
have to take a part in moderating the consequences 
of rash or unfortunate banking, and in meeting 
an adverse balance of indebtedness. This con- 
clusion brings us to the statistical problem. Is the 
40,000,000, which I put forward as a safe maximum 
for the reserves, so far as the convertibility of the 
currency is concerned, still adequate when the 
possible magnitude of India's adverse balance of 
indebtedness is our test of sufficiency ? 

This problem is even less capable than the former 
of exact solution. The variable, elements in India's 
international balance-sheet are chiefly (i.) the excess 


of exports over imports, including treasure, i.e., the 
trade balance; (ii.) the amount of new fixed capital 
lent to India by European capitalists ; and (iii.) the 
amount of short -period loans afforded to India by 
the European Money Market. 

We require to know the magnitude of possible 
variation in these items, rather than the absolute 
amount of the various annual payments which India 
has to make, in order to gauge the possible balance 
of indebtedness against her. The greatest stress is 
commonly placed on the first of them the trade 
balance. But in the normal state of affairs receipts 
and payments only balance after account has been 
taken of capital transactions ; and if a certain amount 
of new capital has been flowing in every year, a 
slackening of this flow affects the balance as adversely 
as a reduction in the volume of exports affects it. 
In 1907-8 the adverse balance of indebtedness was 
largely due to a change in the trade balance ; on the 
one hand, goods ordered during the boom continued 
to pour into Bombay for some weeks after they had 
become unsaleable, thus continuing for a time a large 
supply of bills on India, while, on the other hand, 
the failure of the monsoon and consequent anticipa- 
tions of a scanty harvest cut off a considerable part 
of the normal supply of trade bills on London. But 
even on this occasion the adverse balance arose to a 
considerable extent out of changes in capital trans- 
actions under items (ii.) and (iii.). The acute 


stringency in the international money markets, 
occasioned by the position in America, made it 
necessary for Exchange Banks and others to reduce 
below their normal level their short -period borrow- 
ings (direct or indirect) in London for use in India ; 
and this stringency also caused the flow of new in- 
vestment to India to fall short of its usual volume. 

Thus, of the adverse balance of some 25,000,000 
which had to be met between September 1907 and 
September 1908, perhaps 18,000,000 was due to 
a change in the trade balance and 7,000,000 to a 
diminution of new capital transactions and to the 
non-renewal of some short -period loans. 1 It is 
not easy, however, to argue from the experience 
of 1907-8 as to what will happen in the future. 
The volume of trade has expanded very greatly 
since that time, 2 and the absolute variation in 
the favourable balance between good years and 
bad is likely to be correspondingly greater. In 
addition, the growth of banking in the intervening 
period has been on a very great scale ; and there is, 
therefore, greater room for disturbance in the short- 
period loan market. If, moreover, the internal 
banking position in India is as weak as in Chapter 
YIL I make it out to be, a serious breakdown there 

1 For a fuller discussion of this question in relation to the events of 
1907-8, see my article on " Recent Economic Events in India " in the Economic 
Journal, March 1909. 

2 Aggregate exports of Indian produce and manufactures : 1906-7 
115,625,135 ; 1911-12, 147,813,000. ' 


may embarrass the Exchange Banks in London, 
however intrinsically sound the position of these 
Banks may really be, in their efforts to assist the 
Indian market. 

28. These are the relevant considerations. But 
any conclusion as to the possible magnitude of the 
adverse balance at which one can arrive on the basis 
of them is little better than a guess. I will give my 
guess for what it is worth. I think the 40,000,000, 
which I have fixed as the maximum figure of what is 
required for the redemption in sterling of such notes 
and rupees as may be presented, is more than suffi- 
cient to meet the adverse balance that is at all likely 
to emerge in any single year. But I do not think 
it certain that this sum would be adequate to the 
necessities of two successive bad years. On the other 
hand, it is necessary to bear in mind that by the 
second bad year there would have been time for a very 
great reduction in the volume of imports, on account 
of the greatly reduced purchasing power of the people, 
and that this might go a long way towards righting 
the balance ; also that, if there was a considerable 
liquidation of short-period loans in the first year, 
it would not be necessary to repeat this to anything 
like the same extent in the second year. In short, 
the natural forces tending towards equilibrium would 
begin in the second year to show themselves more 
strongly. Nor is it necessary to accumulate reserves 
in advance for every eventuality. Two bad years in 


succession are not very likely ; and, if they do come, 
the Secretary of State will have ample time to make 
his arrangements for borrowing. 

I think it a sufficient concession, therefore, if the 
40,000,000 be given as the proper limit, not as 
before of the aggregate sterling resources of all kinds, 
but of the Gold Standard Reserve and the sterling 
branch of the Paper Currency Eeserve (i.e. excluding 
the Gash Balances). 

In a country such as India, where all available 
resources are required for capital expansion, and 
where it is not sound or humane policy to burden the 
present overmuch for the sake of the future, it is 
nearly as important to avoid extravagance in the 
reserve policy as to avoid undue parsimony. As the 
rupee and note circulation is increased, the propor- 
tion of reserves ought to grow, of course, pari passu. 
But in existing circumstances to hold much more 
than 40,000,000 in sterling in the Gold Standard 
Eeserve and the Paper Currency Reserve together 
would border on extravagance. If the reserves were 
somewhat lower than this, I do not think it would 
necessarily be blameworthy to leave them so, pro- 
vided it would prove a very burdensome thing to 
raise them. For the expedient of a loan is always 
available. 1 My conclusion, rather, is that the reserves 
should be allowed to reach some such figure as this 

1 The Government of India stands in a particularly strong position in this 
respect, because few countries have so good a market for their loans at a 
foreign centre as India has. 


by the natural processes of growth, before sums are 
diverted from them to other purposes. 

A very few years ago hopes of reaching so secure 
a position, as this would have seemed chimerical. But 
the details given on p. 131 show that in December 1912 
tlie sterling reserves already amounted to somewhat 
more than this. It is not yet clear, however, that 
their present amount is normal. If it turns out to 
be so, then a position of adequate strength has been 
attained already. But the form in which these 
reserves are held is open to much criticism, and this 
must be my next topic. 

29. The criticisms which have had most popular 
vogue have been mainly directed against the absolute 
amount of the Gold Standard Reserve, against the 
investment of a large part of this reserve in securities, 
and against the maintenance in London of some part 
of the gold in the Currency Reserve. 

In regard to the amount of the Gold Standard 
Reserve, Lord Curzon, in 1904, was inclined to think 
that 10,000,000 would be a proper figure. In 1905 
Sir E. Law, the Financial Member of the Viceroy's 
Council, suggested 20,000,000. In 1906 Sir B. 
Baker thought 20,000,000 a suitable minimum. 
More recently, in 1912, 25,000,000 is the amount 
which responsible officials have announced that they 
are aiming at. Sir E. Law and Sir E. Baker both 
based their estimates on the amount which the 
Secretary of State would require for his Home 


Charges if he had to curtail his drawings of Council 
Bills by one -third or one -half for a considerable 
period. I do not think that this is the most useful 
point of view from which to approach the question, 
or that the proper magnitude of the Gold Standard 
Reserve can be discussed without reference to the 
magnitude of the other reserves. 

30. The other two criticisms quoted above lead on 
to the general question of how the sterling resources 
should be held and how they should be divided 
between the several Eeserves. The second of these 
questions is mainly a matter of book-keeping, but has 
nevertheless some importance. The Government of 
India's present system has no logical basis, is exceed- 
ingly difficult to understand, and has often led, in 
consequence, to a good deal of misunderstanding. 
The ideal system should be as simple and logical as is 
compatible with leaving the authorities a free hand to 
shift and adjust as the necessities of the moment may 
require. The present system is the outcome partly 
of historical origins, partly of the authorities' not 
having allowed themselves by law a perfectly free 
hand. The much criticised practice, for example, of 
holding six crores of coined rupees in the Gold 
Standard Eeserve is probably due to the provision by 
which that portion of the Currency Eeserve, which is 
held in London, can be held only in gold. If rupees 
have to be released hurriedly from the silver portion 
of the Gold Standard Eeserve in India, the authorities 


have a completely free hand as to the form in which 
they make the corresponding addition to their sterling 
reserves in London ; whereas, if they are released from 
the Currency Reserve, the corresponding transference 
in London must be made wholly in gold coin a course 
which may sometimes be exceedingly inconvenient at 
the moment. 

31. If the authorities allowed themselves more 
latitude as to the manner in which the Currency 
Reserve might be held, it would be a mere book- 
keeping transaction to transfer to this reserve the 
rupees now held in silver in the Gold Standard 
Reserve and to replace them by a corresponding 
transfer of gold ; but such an arrangement would be 
more logical and easier to understand. 

32. I think, therefore, that there might be con- 
siderable advantages in the adoption of some general 
scheme for the reserves such as the following : 

(1) "While it would be legal to hold the Gold 
Standard Reserve in any formgold, securities, bills 
of exchange, loans, or rupees it should be normal in 
good times to hold, say, 11,000,000 in sterling 
securities and the rest in gold either in London or 
India, but preferably in London. 

(2) Power should be taken to invest a larger 
amount of the Currency Reserve than at present (say 
7,500,000 sterling securities in addition to the rupee 
securities instead of 2,500,000 as at present), and 
to hold a prescribed maximum proportion (say one- 




third) of it in bills of exchange or on loan at short 
notice either in India or London. 

All this, after the necessary change of law, could 
be effected by a change in book-keeping; and in 
December 1912 the account would have stood as 
follows (compare the actual state of affairs as given 
on p. 131): 


Gold Standard Keserve in London 
Gold Standard Keserve in India 
Currency Keserve in India 

Money at Short Notice 
Currency Reserve in London 
Cash Balances in London 

Sterling Securities 
Currency Keserve 
Gold Standard Keserve . 

Currency Keserve 










33. Some changes of substance might be added to 
these changes in book-keeping and are naturally sug- 
gested by them. There is, first, the question whether 
the gold portion of the reserves ought to be held in 
India or in London. Readers of Chapter IV. will 
know that there are, in my opinion, no advantages in 
keeping gold in India, and that such a policy involves 
a direct money loss through the cost of originally 


carrying the gold to India and the cost of bringing 
it back again to London when, at a later date, it is 
required to support exchange. But Indian opinion 
views with suspicion the holding in London of the 
greater part of India's gold reserve, and this opinion, 
though ill-founded, is likely to persist for some time 
to come. The amount of expense involved in keep- 
ing gold in the Indian reserves is, in relation to the 
issues involved, not great: and it might be well 
worth while to incur it in order to avoid the 
currency system's falling under a suspicion, however 
ill-founded. It might be a satisfactory compromise, 
therefore, if, as a normal practice (but not as a legal 
requirement), the gold in the Gold Standard Eeserve 
were held "ear-marked" at the Bank of England, but 
the gold in the Currency Reserve retained in India. 
It may be added that the authorities seem, in fact, 
to be moving somewhat in this direction ; for it is 
understood to be their intention to accumulate 
5,000,000 in gold "earmarked" for the Gold 
Standard Eeserve. 

If, however, a large part of the gold be held in 
India, it is of the utmost importance, in the event 
of a crisis, that the gold should be shipped by the 
Government to London and sterling drafts on London 
sold against it, or, if it were released in India, that 
the banks only should be allowed to get it, and on an 
undertaking to export it. Otherwise, if it were made 
freely available in India, a part might be lost and 


wasted (so far as the support of exchange is con- 
cerned) in hoards. 

34. The suspicion which is felt with regard to the 
holding of Indian gold in London is exceedingly 
natural, and can be completely dissipated only by a 
fuller knowledge of the currency system and of the 
mechanism of the foreign exchanges, than the gener- 
ality is likely to possess. It is natural to think that 
this gold is more at the disposal of the London 
Money Market than it would be if it were in India, 
and that the Secretary of State, under corrupt or 
interested pressure, can easily place it at the disposal 
of London financiers. Apart from the question how 
far the Secretary of State is really open to such 
pressure, it may be doubted whether he is likely to 
be exposed to it, because at a time of real stringency 
it will prove easy, I believe, for the London Market 
to get hold of some part of the Indian gold, whether 
held in London or in India, by perfectly legitimate 
means. India is normally in the position of owing 
London money ; this debt is discharged partly by 
the consignment of goods, partly by the renewal at 
frequent intervals of short loans or credits made by 
the London Market to the Indian Market on bills of 
exchange or through the Exchange Banks, and partly 
by new permanent loans. If there is great stringency 
in the London Market and London is in urgent need 
of funds, the use of the last two methods can be so 
much restricted that India can be practically forced 


to pay what is owing in gold. It is, in fact, pre- 
cisely because she is open to this pressure that it is 
necessary for a considerable gold reserve to be kept. 
So long, therefore, as the gold is freely available 
either in India or in London for the support of 
exchange, it is unlikely that it can be withheld from 
the London Money Market if this Market really 
wants it. If it is in London, India will be able, by 
the sale of telegraphic sterling transfers in Calcutta, 
to discharge her due obligations cheaply and without 
delay ; if it is in Calcutta, additional charges and a 
loss of time must be incurred. 

A feeling of jealousy on a country's part, lest 
some other country should have a lien on its gold 
reserve, is frequently liable to arise at the present 
time, but is essentially opposed in spirit to the whole 
purpose and meaning of keeping gold reserves at all. 
Gold reserves are meant to be used in times of diffi- 
culty, and for the discharge of pressing obligations. 
It is absurd for a man with a large balance at his 
bank to default to his creditors, because a feeling of 
jealousy, in regard to any one in whose favour he draws 
a cheque, prevents him from ever drawing one. Mr. 
Bagehot certainly did England a great service in dissi- 
pating from the minds of her financiers this primitive 
prejudice ; for wonderfully few other countries have 
yet learnt that gold reserves, although no doubt they 
serve some purpose when they are held for show only, 
exist to much better purpose if they are held for use also. 


Vague stirrings of the original sin of mercantilism 
always inherent in the mind of the natural man and 
urging him to regard gold as beyond everything 
essential wealth; jealousy of the too powerful magnates 
of the London Money Market obtaining what should 
belong to India's Market for their own purposes ; 
jealousy of the Secretary of State seeming, like a 
man who invests abroad, to seek in this way an 
independence of India in case of trouble ; jealousy of 
Great Britain, who might use or regard India's cc ear- 
marked" gold as her own war-chest; all combine 
to make a powerful, natural, and yet unfounded 
prejudice which it is exceedingly difficult to combat. 
Nothing is commoner than to read incitements against 
malevolent financiers who would seek to deprive 
India of her "fair share" of the world's new gold. 
India must be allowed, I suppose, to hug her sterile 
favourite. In spite of the notorious fact that the 
Bank of England holds less gold than the Central 
Bank of any other first-class Power, far less even 
than the Caja of the Argentine, the belief will con- 
tinue that the amount of gold a country holds at home, 
rather than the degree of promptness and certainty 
with which at all times it can meet its international 
engagements, is the measure of its financial strength. 

35. What other changes of substance might be 
made usefully? By far the most important is con- 
nected with the proposed power to make advances 
from the Currency Eeserve on bills of exchange and 


other approved security, as briefly described in 
Chapter III. 

The policy pursued during 1912 of holding large 
cash balances in London and of lending them out in 
the London Market provoked widespread criticism 
both in India and at home. The line of thought 
underlying this criticism appears to me to be entirely 
reasonable. If the Government of India hold in 
London a penny more than is required to establish 
the stability of their financial system, they are 
certainly diverting resources from India, where they 
are greatly required, to the detriment of India's 
own trade. I do not think, however, that the 
authorities are in fact open to any serious blame 
up to the present time. The holding of such large 
balances in London has not been part of a permanent 
policy, and was due in 1912 to a combination of 
circumstances which could not easily have been fore- 
seen. And further, the Government have not until 
quite lately held more sterling resources altogether 
than have been required for the stability of the 
system. Public feeling points, nevertheless, in the 
direction of what, in the future, will be the right 
policy. If I am right in thinking that about 
40,000,000 in the sterling Eeserves is in present 
circumstances adequate, further accumulations in 
the hands of Government ought to be put at 
the disposal of the Indian Money Market and not 
converted into sterling. At present there is no 


machinery for doing this; and the absence of the 
appropriate arrangements constitutes a serious gap 
in the country's financial system. What would be 
thought in France or Germany, or in any other 
European country, if an expansion of the note issue 
could not be made against the discount of home bills, 
but only against a corresponding deposit in cash cent 
per cent? Yet this is the position in India. The 
Government (apart from their deposits in the 
Presidency Banks, which will be dealt with later on) 
have no choice between allowing the funds which 
accumulate in their hands to lie absolutely idle in 
India and transferring them to London to earn a low 
rate of interest there. 

If the use of notes continues to increase, and if 
40,000,000 is an adequate figure for the sterling 
Reserves, a considerable sum may soon be available 
in India from the funds of the Paper Currency 
Reserve. Every addition, moreover, to the Gold 
Standard Reserve reduces to some extent the need 
for holding large amounts of sterling in the Paper 
Currency Reserve. Great advantages may be obtained 
if the surplus funds in the Paper Currency Reserve 
be used, not as a permanent or quasi-permanent loan 
to Indian traders, but to provide elasticity in the 
seasonal supply of currency and to make possible the 
increase in the stock of purchasing power in the form 
of money which is temporarily required in the busy 
season, without having to raise it in London, Per- 


manent additions to the currency must be obtained 
in the future as they are at present. But temporary 
additions, due to seasonal demand, ought to be pro- 
vided by a suitable organisation of credit money in 
India herself. 

The advances from the Currency Reserve, therefore, 
must be made at a fairly high rate of interest and for 
periods not exceeding three months ; and they should 
be so arranged that the Government would regain 
possession of its funds and the advances be reduced to 
nil in each slack season. Thus the Government would 
begin each busy season with their funds intact ; and 
they would not lend until the success of the season 
was assured, and it was plain that the general position 
warranted it. The advances would be made in notes 
or rupees, according to the demand. These prosperity 
advances, therefore, are to be sharply distinguished 
from the adversity advances, discussed on pp. 160-163, 
which would be made in sterling drafts, and which 
would be governed by wholly different considerations. 

36. There remains for discussion the question of 
the Government's Cash Balances. 1 I will begin with 
the method of managing that part of them which is 
held in India. It will be useful to know in what way 
this method has grown up. 2 

When, in 1862, the right of note issue was taken 
away from the Presidency Banks, they were given as 

3 In continuation of what has been said in 4. 

2 See Brunyate, loc. tit. chap. vii. } from which the greater part of what 
follows is summarised. 


part recompense the use of the whole of that part 
of the Government balances which would otherwise 
have been received at the General Treasury, or at 
places where the Banks had branches, provided that 
sums in excess of a prescribed amount (70 lakhs in 
the case of the Bank of Bengal), if not held in cash, 
should be invested in Government paper and other 
authorised securities. Difficulties very soon arose 
(in 1863) through the Government's requiring the 
use of its funds at a time when the Bank of Bengal 
could only sell out the securities in which it had 
invested them at a considerable loss. The system 
of virtually compelling the Banks to lock up the 
Government funds in securities, not easily saleable 
at all times, was plainly vicious, and in 1866 a new 
arrangement was made by which the Banks were 
permitted to use the whole of the balances, placed 
with them for the time being, for banking purposes. 
This seems to have worked satisfactorily up to 1874. 
In that year there was a famine in Bengal, and the 
Government had to buy rice in Burma and send it 
to Bengal for relief purposes. The rice had to be 
paid for in cash ; but when the Government intimated 
to the Bank of Bombay that they would have to 
draw out about 30 lakhs (300,000), their balance at 
the Bank then being about a crore (1,000,000), the 
Bank was unable to let them have the money. In 
the correspondence which the Viceroy (Lord North- 
brook) raised in regard to this, the Secretary of State 


(Lord Salisbury) suggested that the Government 
should release themselves from their engagement to 
leave their whole balances with the Banks and that 
they should retain the surplus in their own Treasury, 
or "lend it for short terms under suitable conditions 
as to interest and security." This interesting sugges- 
tion, closely anticipating more recent proposals, was 
not acted on, the Indian authorities thinking it 
improper that the Government should appear to enter 
into competition with the Banks. But in 1876 the 
Keserve Treasury system was set up, the Government 
undertaking to leave, ordinarily, certain minimum 
amounts at the Banks and diverting the bulk of the 
rest of their funds into their own Eeserve Treasury. 
In 1878 it proved inconvenient to divert from the 
Banks immediately the whole of the proceeds of a 
newly raised loan, and the Comptroller-General was 
told that he " would be at liberty, to the extent to 
which he could conveniently do so, to accommodate 
the Banks with temporary advances from the Reserve 
Treasury, provided they were willing to pay interest 
on such advances at the current rates." No special 
security was taken from the Banks for the sums thus 
lent to them. For some time loans were freely given 
in this way. In 1889 the Government declared 
" that any assistance in relief of the Money Market 
which may be afforded by means of the Treasury 
Eeserve can only be made (l) through the Bank, (2) 
at its published rate of discount, (3) in relief of 


temporary stringency." Up to 1892, however, loans 
were made as before. From 1892 to 1899 loans 
-were made very rarely. In 1899 the Secretary of 
State wrote to the authorities in India : " I see no 
objection to your lending to the Presidency Banks, on 
the security of Government paper, at such rates of 
interest from time to time and for such periods as 
you think best. I am inclined to think that the rate 
should, as a rule, be not below the Bank rate." Be- 
tween 1899 and 1906 such loans were made on four 
or five occasions; but since 1906 there have been 
none. The balances left with the Banks without 
interest normally exceed, however, the prescribed 
minima. 1 

The question of the proper employment of the 
Indian Cash Balances is, therefore, a very old one, 
and one in regard to which the Government have 
pursued no consistent policy. The effect of recent 
practice, however, has been on the whole to divert 
more funds than formerly from banking purposes. 
On the one hand the Government have been less 
willing to allow the Banks loans in addition to the 
normal balances kept with them, and on the other 
hand the general level of the cash balances has been 
getting higher. 

While the Government's practice has become 

1 All this refers to the "balances at the Head Offices, " There is no limit 
to the Government deposits at branch offices. But the latter are held 
absolutely at call, and in actual practice are removed with the utmost free- 
dom. " Bnmyate, loc. tit. p. 98. 


stricter, it is arguable, I think, that there is less need 
for it. Originally, we have seen, the Government 
banked with the Presidency Banks, and difficulties 
arose because, the Government's deposits bearing a 
high proportion to the Bank's total resources, it was 
not easy to release a large part of these deposits 
suddenly. This would no longer be the case to 
nearly the same extent, even if the Government were 
to place much larger sums with the Banks. In 1870 1 
the public deposits at 3,600,000 fell not far short of 
the total private deposits and exceeded by 50 per 
cent the capital and reserve of the Banks; in 1880 
they were 1,900,000, and were about one-third of 
the private deposits; in 1890 the figures were 
2,400,000, equal to about a quarter of the private 
deposits; in 1900, 1,900,000, equal to less than 
a quarter; in 1912 the Government deposits at 
2,500,000 were not much more than a tenth of the 
private deposits. Moreover, the capital and reserves 
of the Banks have doubled since 1870. 

37. The portion of the Cash Balances deposited, 
under the above arrangements, with the three Presi- 
dency Banks varies, of course, from week to week. 
The amount normally placed with the Head Offices 
of the Banks has fluctuated for some time in the 
neighbourhood of 1,000,000. In addition to this, 
further sums, fluctuating about 1,500,000, are held 
at branch offices of the Banks. These are deposited 

1 See table given on p. 204. 


on a different understanding (see p. 184, footnote) from 
that governing the sums at the Head Offices, and 
are held literally at call, the amounts at particular 
branches being subject to wide variations. The total 
sums placed with the Banks, head and branch offices 
together, are usually about 2,000,000, and the 
maximum deposits in recent years have been about 
3,000,000. On these deposits, as in the case of 
the Bank of England and the British Government 
deposits, the Banks pay no interest. The whole of 
the rest of the Government Balances is maintained in 
cash (rupees, notes, or sovereigns) in the various 
Government Treasuries. This is the present position. 
The Government are free in exceptional circumstances, 
as we have seen above, to place additional sums with 
the Presidency Banks on which interest is payable. 
But advantage has not been taken of these powers 

38. In view of the facts mentioned at the end of 
36, I am of opinion that the Eeserve Treasury 
system needs reconsideration and that at present 
rather more funds, perhaps, than is necessary are 
withdrawn from the use of the Money Market into 
the Treasuries. 

But the critics referred to in 35 are following 
a false track when they argue that much offence lies 
in the present use of the Cash Balances, and that the 
main remedy for the seasonal stringency of the Indian 
Money Market is to be found in lending out these 


balances in India during the busy season. In thinking 
that any substantial remedy is to be obtained by 
loans from this source, they are paying too much 
attention to the transient circumstances of a single 
year. I believe, for the reasons given below, that 
the Indian Money Market cannot expect very much 
assistance from the Cash Balances, and that they have 
much more to hope for in the future from the growing 
resources of the Paper Currency Eeserve. 

Only under one or other of two conditions could 
loans from the Cash Balances be important : first, if 
the proceeds of taxation tended to accumulate in the 
Government Treasuries in the autumn and winter 
months so that the balances tended to be above their 
normal level at the busy season ; and second, if the 
Government were to pursue the foolish policy of 
habitually keeping more ample balances than they 
really required. The first of these conditions is not 
fulfilled to any important extent The land tax is 
collected, naturally, after the harvest has been sold, 
not during it ; and at the end of the calendar year 
the surplus balances are small. The totals of the 
Indian Balances on August 1 and January 1 of recent 
years are shown below : 



August 1. 

January 1. 


Total Balances 


Total Balances 


in India. 


in India. 




































The total balances include the working balances 
in the innumerable District Treasuries all over India 
and the sums already deposited with the Presidency 
Banks, When, therefore, we are considering to what 
extent the Government could lend at the height of 
the busy season, we must chiefly pay attention to the 
sums in the Reserve Treasuries on January 1. The 
above figures show conclusively that, as a rule, the 
Indian Money Market cannot expect substantial 
assistance from this source at the time of year when 
it is most needed. Except in 19 13, 1 the resources of 
the Eeserve Treasuries on January 1 have been in 
recent years between 1,000,000 and 2,000,000. 

After January 1, it is true, the revenue comes in 
rapidly. 2 But as a matter of fact, the funds which 

3 The exceptional circumstances of 1913 arc dealt with in Chap. VIII. 

2 See Report of Comptroller of Currency, 1911-12: "In July the 
balance generally reaches its highest level. From July onwards until 
December the revenue collections are comparatively small and the balances 
steadily go down till they reach their minimum level in November or 
December. After December the surplus revenue receipts far exceed the 
demands for expenditure." 


accumulate from the proceeds of revenue between 
January and April are quickly released and returned 
to the Money Market, as matters now are, through 
the encashment of the Council Bills which are 
generally sold in large quantities at this time of year. 
If this money were to be released by loan instead of 
by the encashment of Council Bills, the effect would 
be that less funds would be remitted to London ; and 
unless we assume that more funds are being remitted 
to London than are really required, this would put 
the Secretary of State to inconvenience in meeting 
the Home Charges. Only in years when sufficient 
funds had been remitted to London earlier in the 
financial year, therefore, would surplus funds be 
available in the Indian Treasury to any important 
extent even in the latter half of the busy season. 

I do not say that the Government should not 
lend from the Cash Balances in India whenever 
exceptional circumstances may lead to their being at 
an unnecessarily high level in the busy season. But 
the sums which could be lent in this way would not 
generally be important, and the amount of elasticity 
which the financial system could gain by these loans 
would be small compared with what it might acquire 
from a reform of the Paper Currency Reserve. I 
should prefer, therefore, that the Indian Cash Balances 
should be held, so far as possible, in notes, thus 
increasing the capacity of the Currency Eeserve, and 
that all advances should be made in form from the 


Currency Eeserve. The question of the use of funds 
in the Cash Balances would then lapse into the 
question of the use of funds in the Paper Currency 
Eeserve. But if a different system of book-keeping 
be preferred, no substantial change is involved in 
what I propose. The method of loaning from the 
Currency Keserve is applicable mutatis mutandis to 
loans from the Cash Balances. 

39. Of the Cash Balances in London no more than 
a working account is kept with the Bank of England. 
The manner in which the rest is dealt with is best 
described in the words of an official memorandum 
issued by the India Office in 1913 [Cd. 6619] : 

The practice followed since 1838 has been to keep a 
certain part of the "balance at the Bank (of England) and to 
lend the remainder at interest. The usual method is to lend 
to certain banks, discount houses, and stock-brokers of high 
standing, whose names are included in an approved list, now 
containing sixty-two names. The list is revised periodic- 
ally, and applications for admission are carefully considered 
with reference to the standing and resources of the applicants 
and the nature of their business. Loans to borrowers on 
the approved list are granted as a rule for periods from three 
to five weeks, occasionally for six weeks, so that the whole 
balance could, if needed, be called in within six weeks. 
The Accountant-General informs the Secretary of State's 
broker daily of the amount of loans that may be renewed, 
the amount of new loans that may be placed, or the amount 
that must be called. The broker is responsible for obtain- 
ing the best possible rate of interest. The amount of a 
loan is not paid out from the Secretary of State's account 
at the Bank of England until the security has been lodged 


at the Bank. In 1909 it was found that the borrowers 
on the approved list could not take the full amount of 
the balances available for loan; and, in order to obtain 
employment for the funds, the broker was instructed, as 
a temporary measure, to deposit the excess amount from 
time to time with leading London banks, usually for 
periods of between one and three months. 

40. In the autumn of 1912 a determined attack was 
made, in the Press and by means of questions in the 
House of Commons, on the management of the English 
Balances, as described above, and on their amount. 
Many of the questions were framed rather with some 
other object than to elicit information. But they un- 
doubtedly had the result that the authorities published 
to the public much ampler details than were previously 
available. A valuable summary of these will be found 
in the official memorandum [Cd. 6619] from which 
I have just quoted. 1 As the outcome of this very full 
inquisition into the whole subject, only two points have 
emerged in which, in my opinion, the authorities are 
open to criticism in detail i.e., apart from wide 
questions of policy. They renewed India Bills (which 
were eventually paid off in December 1912) when 
they could have very well afforded to discharge them. 
If the season of 1912-13 had been a bad one, or if 
their expectations had been upset in any other way, 
it would always have been open to the India Council 
to issue the Bills afresh. Their action appears to the 

1 See also Lord Inchcape's letter to the Times of November 12, 1912. I 
forbear to enter in detail into what is not, in reality, one of the truly vital 
aspects of Indian Government Finance. 


outside critic to have been one of ill-considered 
caution. The other point is a trifle and reflects, per- 
haps, on a curiosity of our economic organism rather 
than on the India Office. It was- slightly shocking 
to discover that the Government broker, who is not 
even a whole-time officer, and has a separate business 
of his own besides his official duties, is the highest 
paid l official of the Government with the sole excep- 
tion of the Viceroy. He has probably been paid too 
high even on current city standards. But it suggests 
once again the old question how long it will be found 
necessary to pay city men so entirely out of pro- 
portion to what other servants of society commonly 
receive for performing social services not less useful 
or difficult. 

41. Some of the conclusions of this chapter may 
be summarised. All countries, since the practice has 
been generally adopted of employing a medium of 
exchange composed of some cheaper material than the 
standard of value, must keep a monetary reserve. 
Where there is a State bank, the bank is usually 
entrusted with this duty. "Where the State regulates 
the currency and the note issue without the inter- 
vention of a bank, the State must itself undertake it. 

1 The payments to the Government broker, from which, no doubt, some 
deduction has to be made for expenses, have been as follows : 

1908 .... 2,642 

1911 .... 10,544 

1912 (up to Dec. 14) . 7,958 


1910 .... 12', 728 

The principles governing the amount of these payments were explained in 
the House of Commons on December 17, 1912, in answer to a question. 


The proper magnitude of the reserve must depend upon 
the particular circumstances of each country. In 
India the reserve must be unusually large, first, 
because India is a great country specially liable to wide 
fluctuations in her prosperity and trade on account of 
climatic conditions the character of which cannot be 
easily foreseen ; and second, because a large amount 
of foreign capital is employed, not only in permanent 
investment, but in temporary loans withdrawable at 
short notice, and because against these foreign 
liabilities India holds no appreciable amount of inter- 
national Stock Exchange securities capable of easy 
realisation. I have argu<fd that 40,000,000 may be, 
perhaps, at present a suitable amount to be held by 
Government in its sterling Reserves. These Reserves 
are most useful if they are held in London, where they 
must necessarily be wanted whenever there is need to 
make use of them. In deference to a public opinion 
which does not clearly understand the purpose of the 
Reserves or the limitations under which the Secretary 
of State must needs act in managing his sterling re- 
sources, it may be worth while to allay a groundless 
suspicion by the compromise of holding a fair propor- 
tion of the reserve of actual gold coin in India herself. 
When a Reserve of some such amount as the above 
has been firmly established, the diversion of further 
funds into any form of sterling or into the London 
Market should be deliberately avoided. 

Stability has been attained already, or is about to 


be. So, on the whole, has economy, though some 
current opinion in regard to the use of gold puts it 
in jeopardy. The system still wants elasticity. A 
machinery ought to be set up, therefore, by which 
further funds, accumulating in the hands of Govern- 
ment through the increased use of notes, may be 
used in India to afford the needed elasticity in the 
seasonal supply of currency. 

Let the Indian public learn that it is extravagant 
to use gold as a medium of exchange, foolish to 
lessen the utility of their reserves through suspicion 
of the London Money Market, and highly advan- 
tageous to their own trade and to the resources of 
their own money market to develop the use of notes ; 
and their financial system may soon become wonder- 
fully well adapted to the particular circumstances of 
their situation. The history of the last twelve years 
has been transitional. The authorities have been 
wisely building up the reserves they ought to have, 
This process has necessarily diverted funds from the 
Indian Money Market, and has naturally excited some 
measure of opposition. But the fruits of cautious 
growth may soon be reaped. 



1. IN passing from Currency and the Finance of 
Government to the kindred topic of Banking, we 
come to a part of the subject where statistics and 
other information are much less freely available to 
the outside critic. The published figures are not 
adequate to tell us much of what we require to 
know, and the literature of Indian Banking is almost 
non-existent. I must run the risk, therefore, of 
sometimes falling into errors of fact, and hope that, 
if these errors provoke criticism, they will bring to 
light the true facts at the same time. 

2. The Money Market and Banking System of 
India comprises the following as its four main 
constituents : 

(L) The Presidency Banks; (ii.) the European 
Exchange Banks ; (iii.) the Indian Joint Stock Banks ; 
and (iv.) the Shroffs, Marwaris, and other private 
bankers and money-lenders. 

The first two of these constitute what we may 
term the European Money Market, and the rest, 



under the leadership of Marwaris and Parsees, the 
Indian or Native Money Market, up-country Banks 
such as the Allahabad Bank and the Alliance Bank 
of Simla, which are Indian Joint Stock Banks under 
European management, occupying, perhaps, an inter- 
mediate position. The local money markets, outside 
the main towns in which European business men 
have offices and where the bulk of the foreign trade 
is handled, are entirely in the hands of Indians. 

3. How close a connexion exists between the two 
money markets native and European how nearly 
the rates ruling in one agree with those in the other, 
and how readily capital flows from one to the other, 
I am not clear. Some evidence bearing on these 
points was laid before the Fowler Committee of 1898, 
but such facts are now fifteen years old. In the 
pre-1899 period it was not uncommon in times of 
stringency for the bazaar rate to be appreciably 
lower than the Presidency Bank rate, and the con- 
nexion between the two money markets seems to 
have been very incomplete. The following quota- 
tion from a letter by Mr. J. H. Sleigh, Secretary 
and Treasurer of the Bank of Bombay, written in 
1898 (reprinted in the Appendix to the Fowler 
Committee's Eeport), is interesting : 

During the last export season, Shroffs' 60 days' sight bills 
were not obtainable over 8 per cent discount. . . . This 
was the rate then ruling in the native bazaar both in 
Bombay and Calcutta, and that, too, while the Exchange 


Banks were greedy to receive fixed deposits for short periods 
at 9, 10, and even 11 per cent per annum, and while the 
Presidency Banks were straining to meet the demands for 
loans at 12 and 13 per cent per annum. But there is no 
singularity in these facts. The same peculiarity has shown 
itself over and over again during periods of financial 
pressure ; and even at the present moment (November 1898), 
while money is not by any means tight, there exists a 
difference of about 2 per cent between the bazaar and the 
Presidency Bank rates. I have ever found that when the 
official rate rose abnormally high, the rate in the native 
market did not respond to the full extent, but generally 
stopped at 7 or 8 per cent, though the Presidency Banks' 
rate might rise to 10 or 12 per cent. The explanation is 
simple. The Shroffs, who finance nearly the whole of the 
internal trade of India, rarely, if ever, discount European 
Paper and never purchase foreign or sterling bills. Neither 
do they lend money on Government Paper or similar 
securities, but confine their advances to the discount of 
hoondees, to loans to cultivators, and against gold and silver 
bullion. The hoondees they purchase are for the most part 
those of traders, small and large, at rates of discount 
ranging from 9 to 25 per cent per annum, but the hoondees 
they buy and sell to each other, which are chiefly the 
traders' hoondees bearing the Shroffs' own endorsements, 
rule the rates in the native bazaar, and are generally 
negotiated, during the busy season, at from 5 to 8 per 
cent discount. They also discount their endorsements 
pretty largely with the Presidency Banks when rates are 
low, and discontinue doing so when they rise above 6 per 
cent. They also speculate largely at times in Government 
Paper, especially during the off season, but rarely or ever 
hold it or lend on it. 

I have seen no evidence for supposing that the 
general conditions outlined in this quotation do not 


still hold ; but in recent years the Presidency Bank 
rates have not risen above 9 per cent, and occasions 
for the operation of the tendencies described above 
have been rarer. The conditions prevailing in the 
Indian Money Market in the period immediately pre- 
ceding 1898 were in many respects very abnormal. 
I suspect that the rates in the two markets may 
appear to be more different than they really are, 
and are explicable by the difference of the con- 
ditions and of security, subject to which business 
is transacted. It is, however, plain that the main 
movements of the interest rate up and down, 
which result from the central facts of the Indian 
seasons and harvests, must be the same in both 
markets, and that the Native Money Market must 
ultimately depend on the European for additional 
supplies of cash, 

4. As I am chiefly interested in the Indian Banking 
System, so far as this book is concerned, from the 
point of view of its effect on the remittance of funds 
to and from India, I shall be concerned for the most 
part with what I have called the European Money 
Market the Presidency and Exchange Banks. But 
an Indian writer, in a position to know the facts, 
could throw much useful light on a question where I 
must necessarily be content with somewhat doubtful 

5. The Presidency Bank of Bengal was opened in 
1806 and received its charter of incorporation from 


the East India Company in 1809. 1 The first Bank of 
Bombay 2 was established under a similar charter 
in 1840, and the Bank of Madras in 1843. The 
establishment of these Banks in the other Presidencies 
put an 'end to the possibility that the Bank of Bengal 
might become a Bank for all India. The Presi- 
dency Banks had, at first, a semi-official character. 
At the foundation of the Bank of Bengal, the East 
India Company contributed one-fifth (the proportion 
became smaller subsequently) of the capital and 
appointed three of the directors. Up to the time of 
the Mutiny the office of Secretary and Treasurer was 
held by a Covenanted Civilian. 

Up to 1862 the Banks had the right of note 
issue ; but this right was so hedged about by a 
restriction of the total liabilities payable on demand 
to a certain multiple (at first three times, later four 
times) of the cash reserve, and of the total liabilities 
of all kinds to the amount of the Bank's capital (up 
to 1839), or of the total note issue to a fixed amount 
(from 1839 to 1862), that the note issue of the Presi- 
dency Banks never became important. In 1862 the 
management of the note issue was taken over by the 
Government in the manner described in Chapter III. 
At the same time the right of note issue by private 

1 See Mr. J. B. Bnmyate's Account of the Presidency Banks (1900), whence 
the historical details which follow have been chiefly derived. Mr. Brunyate's 
Account is of the highest value to students of banking history. 

2 The first Bank of Bombay went into liquidation in 1868, although its 
liabilities were eventually paid up in full. A new Bank of Bombay was 
formed in the same year. 


Banks was finally abolished. 1 In 1876 the Govern- 
ment relinquished their share of the capital of the 
Banks and their right of appointing directors. 2 Since 
then the Presidency Banks have lost their official 
character, but remain distinct from other Banks in 
that they are governed by a special Charter Act (the 
Presidency Banks Act of 1876). 

6. The Presidency Banks have worked from the 
beginning under very rigorous restrictions as to the 
character of the business which they might undertake. 
These restrictions were originally due partly, perhaps, 
to a feeling of jealousy on the part of the Court of 
Directors of the East India Company lest the Banks 
should compete in business (such as foreign exchange) 
which the Company regarded as its own ; but chiefly 
from a proper wish that semi-official institutions, in 
a country so dangerous for banking as India, should 

1 By 1862 such, issues were of negligible account, but in earlier times they 
had been important. "Probably the first banking institution in India, on 
European lines, was the Bank of Hindustan, which was established in Calcutta 
about 1770 by a private trading firm. The notes of this Bank, though not 
recognised by the Government, obtained a local circulation which occasionally 
reached forty or fifty lakhs and generally averaged about half that amount." 
It is said that they were " received for many years at all the public offices in 
Calcutta scarcely excepting the Treasury itself." On two occasions, once in 
1819 and again in 1829, the occurrence of a panic led to the presentation for 
payment of about twenty lakhs' worth of the notes, and the demand was 
promptly met. (Brunyate, loc. cit. p. 55.) This Bank and others disappeared 
in the commercial disasters of 1829-1832. "Out of their ruin rose the 
Union Bank, a Joint Stock Bank created by co-operation among all the leading 
Calcutta houses." (Brunyate, loc. cit. p. 59.) In 1834 the Bank of Bengal 
refused to accept the notes of its formidable rival, and in 3848 the Union 
Bank disappeared. 

2 This was iti some degree consequent on the failure of the Bank of Bombay 
in 1868, the Government having found itself in the awkward position of 
being a shareholder in a Bank, its liability for which was not clearly defined. 


be conducted on the safest possible principles. 1 An 
exceedingly interesting history of the restrictions is 
to be found in Mr. Brunyate's Account. In 1862 
they were greatly relaxed, but the most important 
limitations were reimposed in 1876. 2 Since that 
time only minor charges have been effected. 

7. The principal restrictions on the Presidency 
Banks are now the following : 

(i.) The Banks may not draw, discount, buy, or 
sell bills of exchange or other negotiable securities 
unless they are payable in India 3 or in Ceylon; 
this restriction has cut off the Presidency Banks 
completely from dealing in sterling drafts or any 
kind of foreign exchange ; (ii.) they may not borrow, 
or receive deposits payable, outside India, or maintain 
a foreign branch or agency for this or similar purposes, 
and they are thus prevented from raising funds in 
London for use in India 4 ; (iii.) they may not lend 

1 The way in which Indian institutions have been moulded on and 
Influenced by English is interestingly illustrated by the fact that several of 
the provisions in the Charters of the Presidency Banks were copied from the 
1695 constitution of the Bank of England. 

2 This also was partly consequent on the failure of the Bank of Bombay 
in 1868. 

3 Except for the use of principals for the purpose of certain specified kinds 
of remittance. 

4 In 1877 the Banks pressed strongly for a relaxation of this provision. 
But the Secretary of State held that "the concession of a power of creating 
a foreign agency in England, such as would be the result of entering into 
loan transactions of the nature of those contemplated, would admit of the 
Banks locking up a large portion of their capital at so great a distance as to 
render it practically unavailable in the case of any emergency arising in 
India." This argument is not one which would be likely to be used at the 
present time. The fear would rather be lest they should lock up funds in 


for a longer period than six months 1 ; (iv.) or upon 
mortgage, or in any other manner upon the security 
of immovable property ; (v.) or upon promissory notes 
bearing less than two independent names; (vi.) or 
upon personal security; (vii.) or upon goods, unless 
the goods, or the title to them, are deposited with 
the Bank as security. 

The fifth of these provisions allows a loophole by 
means of which the rules can be made to work in 
practice less rigorously than appears on paper. Any 
two names will satisfy the letter of the Presidency 
Banks Act ; but any two names are not necessarily 
very good security. After getting two names to 
satisfy the Act, the authorities of the Banks can then 
proceed to satisfy the dictates of cautious banking 
by taking, as well, some of the other kinds of 
security upon which, technically, they are forbidden to 
lend. It is an excellent instance of the consequences 
of an attempt to control banking by an elaborate Act 
forty years old. The last provision has led, I believe, 
to the Banks establishing a kind of bonded warehouse 
for the reception of merchandise. In other cases the 
borrower's own mill or warehouse is made to serve 
the purpose by the expedient of the Bank's paying 
the wages of his watchman. Where the personal 
security of the borrower is obviously good, there must 
be a temptation to allow him to value the goods 
generously, rather than to put the Bank to the in- 

1 Up to 1907 the maximum period was three months. 


convenience of housing or watching a greater bulk of 

As some recompense for these restrictions, the 
Presidency Banks have been allowed to hold a 
portion of the Government balances without payment 
of interest. The use of these balances was first 
granted them in 1862 as compensation for their 
being deprived of the right of note issue. Up to 
1876 the Presidency Banks held, subject to certain 
conditions, the whole of the Government balances 
which would have been " paid in ordinary course into 
Government Treasuries at the places where the head 
offices and branch offices of the Banks are established." 
But on more than one occasion the Banks made diffi- 
culties when the Government desired to withdraw large 
sums at short notice. In 1876, therefore, the "Reserve 
Treasuries were established, and since that time only a 
portion of the balances has been placed with the Banks. 1 
8. The present constitution of the Presidency 
Banks is to be explained, therefore, by their long 
and complicated history. The restrictions under 
which they work have in the past contributed, 
beyond doubt, to their stability. The Bank of 
Bengal has seen the rise and fall of numerous 
powerful rivals. Only by virtue of its being 
absolutely precluded by law from the more specu- 
lative forms of business, has this Bank survived the 
half-dozen or more violent crises by which the Indian 

1 See 36-38 of Chapter VI. 



financial system has been assailed in the last hundred 
years. And, in spite of the restrictions, the Presidency 
Banks have shown great vitality and a power of ex- 
pansion hardly less than that of the Exchange Banks 
in the happier circumstances of the last decade. But 
their constitutions are exceedingly out of date at the 
present time. The considerations which originally 
gave rise to them are no longer operative ; since the 
introduction of the Gold Standard, for example, 
dealing in foreign exchange has ceased to be a 
highly speculative business. And they do not play 
as useful a part in the Indian Financial System, as 
with a different history behind them they might do. 

9. The principal statistics of the three Presidency 
Banks are as follows l : 

Dec. 31. 

Capital, Reserve, 
and Rest. 

Public Deposits. 

Private Deposits. 
















8,645,000 l 









































1911 2 





1912 2 





* An exceptional year, due to the excessive abundance of money. 
2 The figures for 1911 and 1912 are not taken from the same returns as the rest, and arc 
not quite strictly comparable with them in one or two details. 

1 The rupee has been converted at the uniform rate of Is. 4d. throughout. 


These figures do not require much commerS 
growth of private deposits since 1900 (rising 
8,500,000 in 1900 to 15,000,000 in 1905 and 
24,000,000 in 1912) is very noticeable. This has 
been accompanied by a fair increase of Capital and 
Keserve and of Cash. The Presidency Banks publish 
weekly statements of their affairs, and it is scarcely 
possible, therefore, that they should " window-dress " 
their balance sheets. The figures given above refer 
to December 31, which falls in the busy season ; and 
the proportion of cash held affords no ground of 
complaint. It should be said, however, that, while 
the public deposits at the head offices are stable and 
not liable to sudden reduction, the public deposits 
at the branch offices stand in a different position and 
are held literally at call. It is necessary for the 
Banks to hold a considerable proportion of these in 
cash at the branches in question, and this arrange- 
ment makes the cash held against the private 
deposits appear in a somewhat more favourable light 
than it should. It must also be remembered that the 
Presidency Banks are to a certain extent Bankers' 
Banks, and that the other Indian Banks reckon their 
balances with the Presidency Banks (included in the 
private deposits) as part of their cash. 

10. The two provisions of the Presidency Banks 
Act which have proved fundamental in their effect on 
the development of the Indian Banking System are 
those which prohibit the HBfeenev Banks from 


dealing in foreign exchange and from raising funds 
in London. To transact these two classes of business 
thought once established they have not limited 
their transactions to them a class of Banks has 
arisen known as the Exchange Banks. Officially a 
Bank is an Exchange Bank if its head office is located 
elsewhere than in India ; but Banks in this category 
coincide very nearly with Banks doing the class of 
business described above. The Indian Specie Bank 
is the only Indian Joint Stock Bank having a branch 
office in London ; but this is probably in connexion 
with its business in silver and pearls, and this Bank 
does not transact any considerable volume of business 
of the kind undertaken by Exchange Banks. 

11. The Exchange Banks proper fall into two 
groups those doing a considerable proportion of 
their total business in India, and those which are no 
more than agencies of large banking corporations 
doing business all over Asia. This second group 
includes the Comptoir National d'Escompte de Paris, 
the Yokohama Specie Bank, the Deutsch-Asiatische 
Bank, the International Banking Corporation, and 
the Eusso-Asiatic Bank These Banks represent in 
India French, Japanese, German, American, and 
Russian interests respectively. No figures are 
published of the proportion of their total business 
which these Banks transact in India. But I should 
be surprised if, even in the case of the Yokohama 
Specie Bank, it would amount to more than five to 


ten per cent ; and in the case of some of them it must 
be much less than this. In what follows, therefore, 
I shall leave these five Banks out of account. 

In the first group there are six Banks the Delhi 
and London Bank (1844), the Chartered Bank of 
India, Australia, and China (1853), the National Bank 
of India (1863), the Hong Kong and Shanghai Bank- 
ing Corporation (1864), the Mercantile Bank of India 
(1893 '), and the Eastern Bank (1910). The dates 
after these Banks give the years when they were 
established. Of these, two, the Chartered and 
the Hong Kong Banks, do a very large business 
in. other parts of the East, especially China 2 ; but this 
does not prevent their Indian connexion from being 
important. The other four are primarily Indian. 3 
It is noticeable that no entirely new Exchange 
Bank now surviving 4 was founded between 1864 
and 1910. This is in spite of the fact that most of 
the above, especially in the last decade, have proved 
enormously successful from the point of view of 
their shareholders. The Delhi and London Bank, 5 

1 This is the date of the foundation of this Bank under its present style, 
but it was formed out of che old Chartered Mercantile Bank of India, London 
and China, which dates much further back. 

2 The Chartered Bank, in spite of its name, has never done business in 

3 But not exclusively. The National Bank, for example, has a large 
interest in East Africa ; this coast has considerable trade connexions with 
India, and the rupee has a fairly wide circulation there (see figures of rupees 
exported given on p. 154). 

4 The New Oriental Bank, established in 1885 (the great Oriental Bank 
Corporation had failed in 1884), went into liquidation in 1893. 

5 1 fancy that it has more the character of an Indian Joint Stock Bank 
and less of the character of an Exchange Bank than the others. 


the oldest established of all, has not shown the 
vitality or power of expansion of the others ; and the 
Eastern Bank, though it seems to have made a good 
start, is still too young to pass judgment OIL But 
the shares of the rest, if the issue of bonus shares be 
allowed for, stand at a premium of about 200 per cent 
or more. It is probable, however, that it would be 
exceedingly difficult to start a new Exchange Bank 
at the present time, except under the aegis of some 
important financial house already established in a 
strong position in India. 1 Indian Exchange Banking 
is no business for speculative or enterprising out- 
siders, and the large profits which it earns are pro- 
tected by established and not easily assailable 

12. This summary leads us, therefore, to the 
important conclusion that the business of financing 
Indian trade, so far as it is carried out by Banks 
with their seat in London, 2 is in the hands of a very 
small number of Banks. They stand, broadly speaking, 
in an exceedingly strong financial position supported 
by large reserve funds. In this matter India is now 
enjoying the fruit of past disasters and of conditions 
"in which the struggle for existence was too keen to 

1 The Eastern Bank was established under the auspices of Messrs. E. I). 
Snssoon, while two important French Banks and Messrs. Brown, Shipley, 
and Co. are represented on the board of directors. 

2 There is of course much business of a semi -banking character 
transacted by financial and mercantile houses, some of them of the first 
magnitude, with establishments both in India and London. But they 
are private firms and publish no information about their business of which 
it is possible to take account. 


allow any but the fittest to survive. If the present 
spell of prosperity lasts too long, she will no doubt 
lose it. 

13. I shall not attempt any complete account of 
the activities of a typical Exchange Bank. Much of 
their business is very like that of any other Bank. 
But it will be worth while to describe in rather more 
detail the most characteristic part of their transactions 
and the part which is most relevant to the topics of 
this book. 

14. In addition to its capital and the reserves 
accumulated from profits, an Exchange Bank 
obtains its funds by receiving deposits either for 
fixed periods or on current account. These 
deposits are received both in India and in London ; 
but it is a principal object of Exchange Banks to 
obtain as much as they can in London, and they 
seek to attract such deposits by offering better 
terms than an English Bank will allow. On fixed 
deposits, received for a year or more, 4 or 3^ per 
cent will be paid; for shorter periods a more 
variable rate; and on current accounts 2 per cent 
will be allowed on the minimum monthly balance or 
on the amount by which the balance exceeds a 
certain fixed minimum. Apart from the cash, 
money at call, and investments, which every Bank 
must hold, a certain part of these funds are employed 
in making loans either in India or elsewhere. But a 
large part is employed in the purchase (or discount) 


of bills of exchange. Some of these bills will be 
negotiated in London and drawn on India, but the 
bulk of them will be negotiated in India and drawn on 
London. A busy Exchange Bank discounts far more 
of these trade bills in India than it can afford to 
hold until maturity. But as they are drawn on 
London houses there is no difficulty in rediscount- 
ing them in London. As the majority of the bills 
are bought by the Banks in India, while cash is 
received for them, either at maturity or through 
rediscount, in London, the Banks are constantly in 
the position of finding themselves in funds in London 
and of wishing to have funds (for the purchase of 
more bills) in India. They proceed, therefore, to 
even up their accounts as between London and India 
by buying, in London, Council Bills (or transfers) or 
sovereigns (from the Bank of England or from the 
agents of Egyptian or Australian Banks) for delivery 
in India, or, perhaps, silver (though their dealings 
in silver bullion are probably much less important 
than formerly) 1 for remittance to India. The 
question of what determines the relative advantages 
of these methods has been discussed in Chapter V. 

The demand for Council Bills, therefore, chiefly 
depends on how much new business the Exchange 
Banks are entering into in India. The method of 
telegraphic transfers enables them to act with great 

1 Another method occasionally worth while employing is the purchase of 
Government Rupee Paper in London and its sale in India. 


despatch on receiving advices from their Indian agents. 
The Indian branches obtain immediately the funds 
enabling them to take the trade bills, the offer of 
which had seemed to them to be at sufficiently 
satisfactory rates to make the transaction taken as a 
whole worth while. A few weeks later the bills reach 
England, are duly accepted, and are capable of being 
rediscounted if the Bank needs additional free funds 
to buy more Council Bills and turn its money over 
again in another transaction of the same kind. 

We are now in a position to understand what the 
Secretary of State means when he says that he has 
sold bills to meet the needs of trade. If he withdraws 
the convenience of telegraphic transfers or forces the 
Banks to put themselves in funds in India by sending 
sovereigns, he causes delay or additional expense in 
the discounting of bills in India. In other words, 
Indian traders are less easily able to turn the goods 
they are exporting into money. On the other hand, 
if the Indian season is a poor one and the exports 
fall off, the offer of bills for discount is reduced and 
the need of the Exchange Banks in London to buy 
Council Bills correspondingly less. 

It is worth noticing that, from the point of view 
of the London Money Market as a whole, it is a mere 
difference of machinery whether the Exchange Banks 
finance the Indian trade by attracting deposits in 
London and hold the bills themselves, or whether 
the Discount Houses and London Banks attract the 


deposits and use them to rediscount bills for the 
Exchange Banks. In so far as the Exchange Banks 
can attract deposits themselves without paying too 
high a rate for them, this alternative is usually the 
more profitable for them, especially since, if they are 
able to hold in this way a considerable proportion of 
the bills they discount, they can afford to wait for 
a favourable moment before rediscounting such bills 
as they have eventually to dispose of. But, apart 
from private profits, the important point is the extent 
to which Indian trade is financed by the purchase of 
Council Bills in London with borrowed money, whether 
this money is supplied by the depositors in Exchange 
Banks or by those who rediscount the bills. 

15. There is, prima facie, some danger to the 
stability of the Indian financial system in the fact 
that its money market is largely financed by funds 
raised, not permanently but for short periods, in a 
far-distant foreign centre. 1 In order to judge accurately 
whether this danger is in any way a real one, it 
would be necessary to have before us certain facts 
which are not ordinarily published. We do not know 
what proportion of the Exchange Banks' total deposits 
are held in England ; or to what extent those which 

1 Th volume of bills, drawn in. India on London and outstanding, is not, 
of course, a correct measure of the extent to which India is being financed 
abroad. A bill may be used to finance the foreign purchaser just as much as 
the Indian seller. For example, a dealer in cotton in India might be paid by 
a 3 m/s Bank credit supplied by the buyer, a Continental spinner ; this 
spinner might get the cotton within a fortnight of the acceptance of the bill, 
which would, therefore, be really financing his cotton factory. 


are so held are fixed for a year or more and how far 
they are at call or short notice. As is often the case 
when banking is under discussion in other countries, 
those who are in a position to know are not in a 
position to speak, while those who are in a position 
to speak are not in a position to know. I will make 
my guess for what it is worth in 18. In the mean- 
time let us discuss the principle which should guide 
us, had we knowledge. 

It is plain that if Banks were to borrow money at 
short notice in England and use it in India certainly 
if they were to do this on a large scale, the situation 
might be dangerous. They might be called on to 
return what they had borrowed in England, and 
unable at short notice to bring back what they had 
lent in India. The principle of which we are in search 
is, therefore, that the sums borrowed on relatively 
short notice in either country should not exceed the 
assets located there. Where, however, bills of exchange 
between England and India are in question, it is not 
immediately plain what part of the Banks 7 funds may 
properly be regarded as located in England and what 
part in India. The answer is, I think, that a bill 
which has been accepted in England, and is payable 
there at maturity, is an English asset, wherever it 
may have been originally negotiated. Thus in the 
case of Indian Exchange Banks, their deposits in 
London (other than those fixed for long periods) 
should be at least balanced by their short-term loans 


in London, their cash in London, their portfolio of 
trade bills having a London domicile, and such of 
their securities as may be readily marketable in 
London. Similarly their liquid assets in India should 
at least balance their short-period liabilities there. 

16. How far these conditions are as a matter of 
fact satisfied, it is, as I have said above, impossible 
to know for certain. The Exchange Banks do not 
distinguish in their published accounts between their 
Indian and London deposits. Jhey do, however, 
give private information to the Indian authorities of 
their deposits in India and elsewhere respectively in 
each year. These aggregates for all the Exchange 
Banks together are published in the Statistics of 
British India, Part II., and are, therefore, available 
to the public two or three years after the period to 
which they refer. 1 

So far as the Indian deposits are concerned, these 
returns are very valuable. But the aggregate of 
deposits outside India is as nearly as possible useless. 
For Exchange Banks of both groups the Banks 
primarily Indian and the agencies of huge European 
institutions doing business in many parts of the world 
are lumped together, so that the total includes the 
whole of the French deposits of the Comptoir National 
d'Escompte and of the deposits, in whatever country, 
of the other Banks with Indian agencies enumerated 

1 The figures for 1910, for example, are in the issue which was obtainable in 
England early in 1913. 



on p. 206. The figures are, therefore, hardly relevant 
to questions peculiarly Indian ; and I will content 
myself with quoting, from the table given in the 
official statistics, the total deposits of Exchange 
Banks made in India, and the cash balances held in 

India against them. 


Deposits in India. 

Cash Balances in India. 








































1 7. Two facts emerge from this table with great 
plainness the rapid rate at which in recent years 
Exchange Banks have been able to increase the funds 
raised by deposit in India herself, and the slow rate at 
which they have thought fit to increase their Indian 
balances. 1 The position has evidently changed a 
good deal in quite recent times. It is tantalising to 
think that two years must elapse before we can 

1 On the one hand, these balances are even weaker than they look, because 
they include the Exchange Banks' balances at the Presidency Banks. On 
the other hand, the Exchange Banks often have sovereigns or Council Bills in 
transit which they may fairly consider, perhaps, as equivalent to cash. 


know how the Banks stood in these respects last 
December (1912). The Statistics of British India 
do not lend their aid to ruder hands than those of 
the historian. 

In the event of an internal financial crisis in India 
the Exchange Banks are probably depending on the 
anticipation that they will be able to remit funds 
from London by telegraphic transfer. In this case 
they rely on not being hard pressed in India and in 
London at the same time. An Indian reserve, such 
as they appear to keep, of from 18 to 20 per cent 
would be respectable, for example, in England. But 
in such a country as India, where banking is ill-estab- 
lished and hoarding more than a mempry, the pro- 
portion held in reserve seems somewhat lower than 
perhaps it ought to be. Possibly Exchange Banks 
have already been in smooth waters longer than is for 
their good. There are famous dates in the history of 
Indian banking which should serve as a memento mori. 

18. When we turn to the assets and liabilities of 
the Exchange Banks in England we find reason for 
supposing a much stronger position; for the bulk 
of the bills of exchange held are probably domiciled 
in London and may be regarded, therefore, as liquid 
London assets. 1 The following table sets out the 

1 A certain proportion of their bills, no doubt, are drawn on the London 
branches of Banks with a foreign domicile. These bills are not always so 
readily discountable as London acceptances, the Bank of England taking 
them unwillingly and charging J per cent extra discount. But for the 
present purpose they can, I think, be regarded none the less as liquid 
London assets. 



figures relating to deposits, leaving out the Hong 
Kong and Shanghai Banking Corporation, because, 
although its Indian business is important, this can only 
be a small proportion of its total business. I include 
all the other Banks given in my first group (see 
p. 207) although the non - Indian business of the 
Chartered and National Banks cannot be accurately 
allowed for. 












Chartered . 
Mercantile . 
Delhi and London 
East urn 























Total . 










The total cash in hand and at bankers held by these 
five Banks at the end of 1912 was about m7f. I 
estimate that in 1910 these Banks may have held 
outside India about <m23 in deposits and about 
m5 cash in hand and at bankers. 

As to the proportion of these deposits which were 
held for long periods there is no accurate information. 
The Chartered and Eastern Banks are alone in dis- 
tinguishing in their balance sheets between fixed 
deposits and current accounts. In 1912 the Chartered 
Bank held mlO|- on current account, etc., and m7| 
on fixed deposit ; the Eastern Bank m|- on current 



account and <ml|- on fixed deposit. 1 More than half 
of the deposits of the Banks as a whole are probably 
held on current account or at short notice. If we 
are to make a guess, the Banks may have held 
in 1910 about 13,000,000 on current account out- 
side India ; but by no means all of this (in the case 
of the Chartered and National Banks especially) would 
be held in London. The question of the amount of 
the London assets of the Banks does not lend itself 
to statistical summary. But I do not think that 
there is the least reason for supposing that the 
position is not a strong one. 

19. The principles which underlie the preceding 
analysis may be illustrated by reference to a 
hypothetical balance sheet, simplified, but less 
simplified than those commonly published. 

(i.) Capital and Reserve 

Fund . 
(ii.) Fixed Deposits in 

London . 
(iii.) Current Accounts in 

London . 

(iv.) Fixed Deposits in India 
(v.) Current Accounts in 

(vi.) Trade Bills on London 

negotiated in India 

and rediscoiinted in 


(vii.) Loans and Advances 

in London . . 3 
(viii.) Loans and Advances 

in India . . .3 
(ix.) Trade Bills on London 

negotiated in India . G^- 
(x.) Trade Bills on India 

negotiated in London 1^ 
(xi.) Cash, etc., in London l| 
(xii.) Cash, etc,, in India . -| 
(xiii.) Securities . . .1 
(xiv.) Miscellaneous assets in- 
cluding silver bullion J 

1 I believe that the Eastern Bank offers rather better terms than the other 
Banks for fixed deposits. 


This would probably be published as follows : 

Capital and Keserve Fund 
Deposits, etc. . . . 


Loans, Advances, etc. . 6 

Bills of Exchange . . 2| 

Cash, etc % 

Securities ... 1 
Miscellaneous assets . . i 


[Bills rediscounted and outstanding, 

Acceptances have been omitted in the above, the 
amount of bills payable is supposed to be deducted 
from cash, and various minor items are omitted. 
The " capital employed in India " seems to be 
(viii.) + (x.) + (xii.) = m5. The " capital employed 
in London " is (vii.) + (ix.) - (vi.) + (xi.) = m5%. 1 
The securities and miscellaneous assets (xiii.) + (xiv.) 
= mlijf, may be regarded perhaps as equally avail- 
able in either centre. If there is a run in India, 
assets must be available there in a liquid form equal 
to (v.). If there is a run in London, liquid assets 
must be available there equal to (iii.). The second 
condition, but not the first, is, in this hypothetical 
example, fulfilled. If the Bank had to remit funds 
back from India to London, this would be most 
simply effected by not entering into new business 
under (ix.). It would not then be necessary to buy 

1 The confusing point here is this : that (ix. ) is the amount advanced to 
Indian merchants, and (x.) the amount advanced to English merchants ; yet 
(ix.) must be reckoned an English asset and (x.) an Indian asset. For 
(ix.) when it falls due is paid in England, although, of course, the Bank has 
advanced money, through the purchase of it. in India. 


Council Bills, and the trade bills already bought 
under (ix.), being rediscounted or allowed to mature 
in London, would swell the available funds there 
automatically. If it were possible to call in loans in 
India and reduce (viii.), then it would be possible to 
buy more trade bills under (ix.) in India (or Govern- 
ment sterling drafts if trade were depressed), without 
having to buy Council Bills in London, and these 
trade bills could then be rediscounted in London. 
If the Exchange Banks are remitting funds back 
to London, this shows itself, therefore, in a poor 
demand for Council Bills; and conversely when 
they are remitting funds to India, there is a strong 
demand for Council Bills. Thus the weakness of the 
demand for Council Bills in times of depression (and 
the strength of the demand for Government sterling 
drafts) partly depends on the action of the Exchange 
Banks. What their action would be in a situation of 
acute stringency bordering on financial panic, it is 
not easy to predict. 

20. So far the only apparent element of danger 
in the banking position seems to lie in the growth of 
deposits attracted by the Exchange Banks in India 
without a corresponding growth in their Indian cash 
reserves. It would be a good thing if the Exchange 
Banks were compelled to distinguish in their balance 
sheets between their Indian and extra-Indian business, 
much in the manner set out in the hypothetical 
balance sheet on p. 218, except that for "London" 


"outside India" would have to be substituted. 1 
They should also distinguish, as two already do 
distinguish, between fixed deposits and accounts at 
call or for short periods. When, as in the case of 
the Exchange Banks, we have to deal with a small 
number of Banks of established position, an insistence 
on due publicity, rather than compulsion or regula- 
tion in matters of policy, is likely to be the proper 
remedy for any weaknesses which may possibly exist, 

21. The next section of the Indian banking world 
comprises the Indian Joint Stock Banks, i.e. those 
Banks, other than the three Presidency Banks, 
registered in India and having their head offices 
there. This is a confusing group, because a great 
number of small money-lending establishments are 
registered as Banks under the Indian Companies Act 
in 1910-11 492 businesses were classified as Banks. 2 
The official statistics separate off, however, those of 
the Banks proper which are of any considerable size, 
those, namely, which have a paid-up capital and 
reserve of at least 5 lakhs (33,000). 

The earlier Banks, coming under this description, 
were usually under European management. Out of 
seven existing in 1870, only two now survive, the 
Bank of Upper India (1863) and the Allahabad Bank 

1 It would be most useful to have a triple classification India, London, 
and elsewhere. But I do not see how the Indian authorities could reasonably 
enforce this. 

2 The great majority (363) of these small money-lending establishments 
were registered in Madras. Most of them are mutual societies, and it would 
not be difficult to exclude them from the official statistics. 


(1865). 1 Between 1870 and 1894 seven more Banks, 
conforming on the whole to this same type, were 
founded, of which four now survive, the Alliance 
Bank of Simla (1874), the Oudh Commercial Bank 
(1881), the Punjab Banking Company (1889), and the 
Punjab National Bank (1894). 2 All these Banks are 
on a very small scale compared with the Presidency 
and Exchange Banks ; but they are distinguished in 
type from most of the more recent creations. 

Between 1894 and 1904 3 no new Banks were 
founded with as much as 5 lakhs of paid-up capital. 
But since 1904 there has been a great outburst of 
fresh activity, and a type of Bank new to India has 
become important. The way was led in 1904 by the 
foundation of the Bank of Burma. This Bank failed 
in 1911, two directors and the general manager being 
found guilty of cheating and sentenced to imprison- 
ment in 1913. In 1906 three Banks were founded, 
all of some importance, the Bank of India (under 
important Parsee auspices), the Bank of Eangoon, 
and the Indian Specie Bank. Until 1910 these three 
Banks remained alone amongst the new creations 
in having a paid-up capital in excess of 15 lakhs 
(100,000). 4 Since 1906 numerous Banks have been 

1 There is also, on a smaller scale, the Bangalore Bank (1868). 

2 There are a few others on a very small scale, such as the Kashmir Bank 
(1882), and the Poona Mercantile Bank (1893). 

3 In 1901 the People's Bank of India was founded, but it did not reach 
the 5 lakhs' limit until 1908. 

4 The Bank of India has a paid-up capital of 50 lakhs and a reserve and 
rest of 5J lakhs ; the corresponding figures for the Indian Specie Bank are 75 


started, amongst the most important of which in 
respect of paid-up capital may be mentioned the 
Bengal National Bank (1907), the Bombay Merchants' 
Bank (1909), the Credit Bank of India (1909), the 
Kathiawar and Ahmedabad Banking Corporation 
(1910), and the Central Bank of India (1911). 

The main object of most of these Banks is, of 
course, to attract deposits (though some of them are 
almost as much concerned at present with placing a 
further part of their unissued capital). For deposits 
fixed for a year the rate offered varies, as a rule, 
from 4|- to 5 per cent, the newer creations generally 
favouring the higher rate. Some Banks offer 6 per 
cent. About the rates for shorter periods there is 
more vagueness. On current accounts 2 per cent is 
generally allowed, though the eagerness of some of 
the newest Banks has led them to offer 2^-. I have 
the advertisement before me of a Bank which offers 
3 per cent on the daily balance, and up to 6 per cent 
on sums deposited for longer periods ; at the head of 
the advertisement appears in large letters Capital, 
Rs. 50,000,000 ; but it appears below that applica- 
tions for shares are invited, and the paid-up capital 
is probably negligible. Some Banks advertise such 
advantages as " Special Marriage Deposits, 50 per cent 
added to Principal in five years 7 time." l 

lakhs and 19 lakhs. The Bank of Rangoon is on a smaller scale and has been 
leas successful. 

1 This represents compound interest at the rate of about 8 per cent per 




4|- per cent on deposits fixed for a year and 2 per 
cent on current accounts in excess of a certain mini- 
mum are very likely reasonable rates to offer in 
Indian conditions, provided that the funds thus 
attracted are not used for speculation and that 
adequate reserves are maintained in a liquid form. 
It is in this respect that the more substantial of these 
Banks are chiefly open to criticism. The official 
statistics are, unfortunately, very much out of date. 
But for the Banks which had a paid-up capital and 
reserve of at least 5 lakhs the available figures up to 
1910 are as follows : 


No. of 

Capital, Reserve, 

and Rest. 


Cash Balances. 














































22. These figures reveal, in my opinion, an ex- 
ceedingly serious state of affairs. If they could be 
brought up to date, they would probably appear even 
worse. As late as 1900 these Banks were compara- 
tively insignificant. Since that time they have suc- 
ceeded in attracting so large a volume of deposits 


as to make them an important part -of the banking 
system of the country. Only six of them date back 
long enough to remember any real financial crisis in 
India (for the depression of 1907-8 was not accom- 
panied by the symptoms of financial crisis). Grow- 
ing up in smooth times, they have thought more of 
attracting deposits than of retaining cash reserves ; 
and in 1910 we find sixteen Banks with deposits of 
17,000,000 and cash reserves of not quite 11 per 
cent. 1 Even of these reserves the greater part is 
probably held by the older and more established of 
the Banks belonging to this class. In the case of the 
smaller Banks, dealing, as they are, with clients to 
whom banking is a new thing and in a country where 
hoarding is still dominant, the cash balances seem, 
from the available indications, to be hopelessly in- 
adequate; and it is hard to doubt that in the next 
bad times they will go down like ninepins. If such 
a catastrophe occurs, the damage inflicted on India 
will be far greater than the direct loss falling on the 
depositors. The growth of banking habits in India 
is, of course, of the utmost importance to the 
country's economic development. A startling series 
of failures will do much to retard it. 

In this connexion the history of the Bank of 
Burma, the first Bank of the new order to be founded, 
is instructive. This Bank was started in 1904 under 
European management by a firm engaged in floating 

1 Here again it is tantalising that no later figures should be available. 


oil companies and other highly speculative enter- 
prises. .The Bank's capital was 117,500, and by 
1911, when it failed, deposits had been attracted to 
the extent of 792,701, a large part of which is said 
to have come from Bombay and Calcutta. To obtain 
these deposits the Bank had offered interest at the 
rate of 6 per cent for deposits placed with it for a 
year ; and many persons, it seems, were deceived by 
its title into believing that it was in some sense a 
Presidency Bank. In the autumn of 1911, after a 
year in which the Burma rice crop had been good 
and had sold at very high prices, and when the 
province generally was prosperous, the Bank failed. 
The balance sheet turned out to be false, and one- 
third of the assets had been advanced against worth- 
less security to a firm in which the directors were 

23. Both in the case of the Exchange Banks and 
in that of the Indian Joint Stock Banks, the u Cash 
Balances" include, I think, balances held at other 
Banks. 1 It is impossible, therefore, to summarise 
accurately the figures for the Indian Banking System 
as a whole Presidency Banks, Exchange Banks, and 
Joint Stock Banks together. The figures given below 
state accurately the total of private deposits ; but in 
the total of cash balances some items must be counted 
twice over. 

1 In the official statistics no definition is given of what precisely is meant 
by ''cash." 



Total Deposits in 
India, excluding 
Public Deposits. 

Total Cash 

Cash Per Cent 
of Deposits. 




68 l 

































l An exceptional year. 

The steady deterioration of the position, as 
shown in the above figures, is exceedingly marked. 
These figures flatter the Banks, rather than the 
reverse. For I have excluded the Public Deposits 
(amounting in 1910 to 2,820,000), and' have 
included the whole of the cash balances (at the 
branches as well as the head offices) held by the 
Presidency Banks against them. If the figures could 
be worked out accurately, the present proportion of 
cash available against the private deposits would 
come out, I suspect, lower by far than appears super- 
ficially from the above table. 

24. To complete the figures of Indian deposits, 1 it 
will be useful to give at this point the deposits in 
the Post Office Savings Banks, which have increased 
at a great rate, though not so fast as deposits in 
Banks, since 1900 : 

1 The Co-operative Credit Societies are not important in this connexion, 
capital, reserves, loans, and deposits altogether heingless than 1,000,000. 



March 31. 

Number of Depositors. 


























1912 1 



1913 2 


1 Limit of annual cask deposits raised from Bs, 200 to Bs. 500. 2 Estimate. 

As in England, the Government do not maintain 
any specific reserve against these deposits. They are 
treated as unfunded debt and used for capital 
expenditure. It is important, therefore, to remember 
that the Government now hold in India nearly 
14,000,000 of unfunded debt repayable at short 
notice to 1,500,000 depositors. This constitutes a 
not negligible claim on their general reserves. 

25. The figures of the preceding paragraphs, in 
their cumulative effect, suggest the following reflection. 
Apart from any deterioration in the proportion of 
reserves held, the question of Indian deposits is now 
important They stand for the first time at a figure 
which is large in relation to the total trade of the 
country and to the resources of the Government. 
If the Banks get into trouble, there will be much 
more far-reaching effects than could have been the 
case formerly. This is quite apart from the question 
whether they are more likely to get into trouble than 



formerly. The question of the reserves they hold 
matters, therefore, more than it used. The informa- 
tion which I have been able to convey in this chapter 
is exceedingly incomplete. But, such as it is, it 
provides strong prima facie grounds for doubt and 

26. The last group of Banks for discussion since 
I have no precise data relating to the private and 
unincorporated bankers or money-lenders consists of 
those numerous institutions registered as Banks under 
the Indian Companies Act, but with a capital 
insufficient or with activities too mixed for inclusion 
in the list of Indian Joint Stock Banks proper, dealt 
with above. 

The available statistics (approximate) are as 
follows : 

March 31. 

Number of Banks. 

Paid-up Capital. 






















There are no statistics of their deposits. While 
the capital of these Banks has increased rather rapidly 
since 1907, the above figures show that it is not 
yet large. 

Our interest in these Banks, however, arises not 


so much out of the banking business which they may 
possibly transact, as out of certain, almost Gilbertian, 
characteristics calculated to bring the name and 
profession of banking into derision or disrepute. 
These Banks have discovered that there is, or may 
be, a useful ambiguity in the public mind between 
nominal capital and paid-up capital, and that nothing 
is cheaper than to increase the former. When, 
therefore, a Bank is registered, its promoters may just 
as well put down as its nominal capital sums ranging 
from 100,000 to 1,000,000 as anything else. One 
comic opera Bank registered in Calcutta in 1910 put 
down 20,000,000, without having at the time of 
the last return any paid-up capital at all. Apart 
from this exceptional venture, the 38 Banks registered 
in 1910-11 had between them a nominal capital of 
1,306,000 and a paid-up capital of 19,500. With 
enormous nominal capitals they combine high- 
sounding titles the Bank of Asia, the East India 
Bank, the Hindustan Bank, the United Bank of 
Commerce, and so forth. Once established, their 
activities are not limited. One of these Banks has 
included in its operations coach-building and medical 

27. Plainly these ventures are not to be taken too 
seriously. But the recent activity of their promoters 
has raised some discussion in India as to whether it 
would not be for the public good to restrain them by 
legislation. In this matter, as is the case in so many 


(her governors knowing no other model), the legislation 
of India has followed the lines of Great Britain's. Just 
as in this country there is no special law relating to 
the incorporation of Banks, so in India Banks are 
registered under the ordinary Joint Stock Companies 
Act. As a Bill to amend this Act has been to the 
front for some time, discussion has naturally centred 
round the question whether this opportunity should 
not be taken of introducing some suitable restrictions 
relating specifically to Banks. 1 While I am inclined 
to think that it would be more convenient to deal 
with this matter in a separate Bill, the important 
point is that decided action of some kind should 
be taken with the least possible delay. The Upper 
Indian Chamber of Commerce, in reply to an inquiry 
from Government in 1910, answered, very wisely, as 
follows : 

The Committee feel very strongly that something more 
is needed (i.e., than in other Companies) in the case of Banks 
where the capital and confidence, not only of the shareholders 
but of the depositors, are involved. New Banks are spring- 
ing up with alarming rapidity, with little share capital 
subscribed ; these Banks are trading on the confidence of 
the depositor who is little versed in money matters but 
is attracted by the name "Bank" and wishes to earn 
interest on his savings. . . . The fear is that if one of 
these mushroom growths fails, others will follow, and the 
timid depositor, unable to discriminate between the sound 
and the unsound concerns, will make haste to get his 
money back from whatever Bank it is in, and his confidence 

1 At the time of writing, this Bill has not yet passed through its final stages. 


in banking institutions thus rudely checked will take years 
to win back. 

Various suggestions have been made as to what 
restrictions would be proper. It has been proposed 
that it should not be permitted to combine banking 
operations with other businesses ; that the accounts 
of Banks should be regularly audited and the results 
published; that fairly detailed accounts 1 should be 
published in the local official Gazette; that all 
institutions calling themselves Banks should be 
required to publish certain specified particulars at 
the head of every advertisement; and that capital 
and reserves should bear a certain proportion to 
liabilities before dividends may be paid. The abuse 
of a great disproportion between nominal and paid-up 
capital could be cured by a stamp duty on registration 
proportioned to the nominal capital. Provisions for 
due publicity will probably lead in the long-run to 
the best results though care must be taken that the 
form for publication of accounts is well suited to bring 
to the light what is most relevant. Eegulations of 
other kinds are apt to have hampering results which 
cannot be easily foreseen. During the infancy of 
Indian banking, nevertheless, it will very likely be 
wise to have some precise rule as to the kind and 
amount of the reserves. 

28. In conclusion, something must be said about 

1 In the published balance sheet, which I have before me, of one of the 
largest of these little Banks, the cash is lumped together with the "invest- 
ments," i.e., with the Bank's speculations. 


proposals for a State Bank. This is a proper subject 
for inquiry by a Eoyal Commission. I am not 
prepared to discuss it here in detail. 

The question is an old one. In 1836 "a large 
body of merchants interested in the East Indies " 
submitted to the Court of Directors of the East 
India Company a project for a " great Banking 
Establishment for British India." Such a Bank, 
"confining its transactions strictly to Banking 
principles and business," and "established by Act 
of Parliament and possessed of adequate capital, 
would, under judicious management and control, 
become an instrument of general good by facili- 
tating the employment of a portion of the re- 
dundant capital of this country (England) for the 
general improvement of Indian commerce, giving 
stability to the monetary system of India, and pre- 
venting those occasional fluctuations to which it is at 
present subject, and also by affording the Company 
facilities and advantages in their future financial 
arrangements." It was also to " facilitate the receipt 
of the revenue and its subsequent diffusion through 
the various channels of the public expenditure, furnish 
the remittance to Great Britain of the sums required 
there for the Home Charges, and enable the East India 
Company to act up to the instruction of the legislature 
by keeping their Government entirely aloof from that 
interference with the commerce of India which the 
present system of remittance involves. . . . At present 


the basis of the Bank of Bengal is too narrow for such 
a customer as the Government." I quote this from the 
Account of the Presidency Banks by Mr. J. B. 
Brunyate, who remarks on its appropriateness to 
present conditions. From 1 8 6 to 1 8 7 6 the possibility 
of the Bank of Bengal's developing into a " Bank of 
India " was constantly in the air, successive financial 
Members of Council being not unfriendly to the idea. 
In 1867 a specific proposal for the amalgamation of 
the three Presidency Banks was laid before the Govern- 
ment of India in a memorandum of complete grasp 
and mastery by Mr. Dickson, celebrated (in his own 
time) for pre-eminent ability as Secretary and Treasurer 
of the Bank of Bengal. The Viceroy's minute was un- 
favourable. " I submit/' he wrote, " that it is not 
for the interest of a State that a great institution of 
the kind should grow up for all India, the interests of 
which may in time be opposed to those of the public, 
and whose influence at 'any rate may overshadow 
that of the Government itself. A Bank of such a 
character would be very difficult to manage. Few 
men in India would be found equal to the task. And 
as regards the interests and convenience of the 
merchants of Bombay and Madras, surely it is only 
natural that they should prefer separate Banks for 
those important centres of commerce." The Secretary 
of State's sole contribution to the discussion no need 
to name him, it is the eternal Secretary of State 
speaking, not a transient individual was as follows : 


Any proposition for changes of a fundamental character, 
such as the establishment of a Central State Bank, or a 
return to the system of Government Treasuries, which 
may hereafter be taken into consideration, must be viewed 
in its general bearings, and not with special reference to 
the circumstances m of a particular Presidency, or of a 
particular crisis. 

The project was smothered in the magnificent and 
empty maxims of political wisdom. 1 

Before the Fowler Committee of 1898, there was 
some desultory discussion of proposals for a Central 
Bank of India, which were supported by a few of the 
witnesses; but, apart from Mr. Hambro's memor- 
andum, no attempt was made to deal with the 
question in detail. 2 

29. At the present time the arguments in favour 
of a State Bank for India are very strong, far 
stronger than they were in 1867 or even in 1898. 
The Government have taken over so many of the 
functions of a Central Bank, that they cannot wisely 
neglect the rest A note issue of growing import- 
ance, the management of the Government's cash bal- 
ances, the regulation of the foreign exchanges, all 
these are controlled together and treated as a whole 

1 These quotations are derived from Mr. Brunyate's Account, loc. tit. 

2 IB their Despatch dealing with the Report of the Fowler Committee 
(August 24, 1899) the Government of India went so far as to declare that the 
constitution of a State Bank, by the amalgamation and absorption of the 
three Presidency Banks, was desirable. For the circumstances and discus- 
sions which led up to the ultimate abandonment of these ideas, see " Papers 
relating to the Proposed Establishment of a Central Bank in India (reprinted 
from the Gazette of India and Supplement, dated the 12th Oct. 1901)." 


in a compact and admirably conceived scheme. But 
other benefits cannot be obtained easily, so long as 
these functions are utterly divorced from those of 
banking proper. I summarise the arguments thus : 

(i.) The existing divorce between responsibility for 
the note issue and that for banking generally is 
contrary to modern banking practice, and is, in 
several respects, a source of weakness. 

(ii.) In particular it leads to the keeping of two 
distinct reserves the Government's reserves and the 
bankers' reserves with no clearly defined relation 
between them, so that the reserves of the latter may 
be insufficient, without the assumption by the former 
of the fact or the machinery of responsibility. 

(iii.) It leads also to a want of elasticity in the 
system, since in modern conditions this elasticity is 
most commonly provided by exactly that co-operation 
between banking and note issue which is lacking in 

(iv.) The absence of a State Bank makes it diffi- 
cult for the Government to use its cash balances 
or any other part of its liquid funds to the best 
advantage, since it cannot prudently place the whole 
of its free resources in the hands of a private 

(v.) The absence of a central banking authority 
leads to a general lack of direction in the banking 
policy of the country : it is no one's business to look 
at the matter as a whole, to know the position of the 


market's component units, or to enforce prudence 
when it is needed. There is a multiple reserve 
system in theory, but hardly an adequate one in 
fact ; and a danger exists that every one is reckoning, 
in a crisis, upon every one else. 

(vi.) The absence of the advice and experience, 
which the officers of a State Bank would possess, is a 
source of weakness to Government itself. There are 
no high officials whose business it is to make finance 
the chief study of their life. The Financial Secretary- 
ship is an incident in the career of a successful 
civilian. A Financial Member of Council is apt to 
come to the peculiar problems of tts office with a 
fresh mind. Thus the financial officers of Government 
spend five years or so in mastering a difficult subject 
and have then reached a seniority which warrants 
promotion to duties of some other kind. So far as 
the Government of India is concerned, questions of 
finance arid currency are in the hands of intelligent 
amateurs who begin with the timidity of ignorance 
and leave off just when they are becoming properly 
secure of their ground. It is not astonishing that 
the centre of power in these matters has tended to 
gravitate to the India Office and the India Council in 
London. For the officials and advisers of the Secretary 
of State have grown up in familiarity with the problems 
of Indian currency. Control from the India Office is 
always looked on, from an instinct often founded on 
wisdom, with jealousy and with suspicion; but in 


questions of currency they are likely, as things now 
are, to have the wider knowledge and experience. 
Yet the element of continuity supplied by the India 
Office though, as I read the history of the last 
decade, it has been invaluable in guiding the 
evolution of the currency is no proper solution 
of the difficulty. With Indian banking this 
authority cannot be adequately in touch, and it 
would be much better if trained experience were 
to be found in India herself. It is a remarkable thing 
that the two classical pronouncements on the funda- 
mental problems of Indian Finance, which have stood 
the test of time Mr. Dickson's, in 1867, on the 
question of a Central Bank, and Mr. A. M. Lindsay's, 
in 1878 and subsequently, on the regulation of a Gold 
Standard should both have come from Secretaries of 
the Bank of Bengal, not from high officials of State. 
(Yet this last argument for a State Bank, though I 
have amplified it in my summary at greatest length, 
is not at all the most important. The arguments 
given first are those which govern the question.) 

30. On the other hand, a fairly good case can be 
made out against a State Bank. Several of the 
defects, outlined above, could be remedied, in part at 
least, by less drastic proposals. The reasons on this 
side are mainly, nevertheless, those of conservatism 
and of caution (or timidity). The question, as soon as 
one attempts to frame practical suggestions, bristles 
with difficulties. The Government are naturally 


afraid of so troublesome a proposal and one so far 
removed from what they are used to ; while there is 
no important body which is sufficiently interested in 
forcing it on their attention. The Banks fear a 
possible rival ; merchants are content with present 
prosperity ; and no one else knows anything about 
it. I shall be astonished, therefore, if action is 
taken while times are good. Perhaps we may have 
to wait for the lessons of a severe crisis. Only 
under some such strong influence as this is it likely 
that the responsible Government will nerve itself to 
the task, or the business community acquiesce in it. 

31. If some day sufficient constructive energy is 
stirred into activity to undertake the task, let the 
frarners of the new Bank's constitution put far from 
their minds all thoughts of the Bank of England. 
It is in the State Banks of Europe, especially in that 
of Germany, or in those, perhaps, of Holland or 
Russia, that the proper model is to be found. 



1. THE Presidency Banks publish an official mini- 
mum rate of discount, in the same manner as the 
Bank of England. As an effective influence on the 
Money Market the Presidency Bank Kates do not 
stand, and do not pretend to stand, in a situation com- 
parable in any respect with the Bank of England's. 
They do not attempt to control the market and to 
dictate what the rate ought to be. They 3 rather, 
follow the market and supply an index of the general 

It is, therefore, as the best available index to 
variations in the value of money in India that the 
Presidency Bank Kates are chiefly interesting; and 
it is in this capacity that I shall make use of them in 
this chapter. 

If we are to use these rates, however, as an index, 
a few warnings are first necessary. There is, of 
course, in India, just as there is in England, not one 
single rate for money, but several rates according to 

the period of the loan required (or the maturity of 













T ,, 







1 " 


1 " 




" " |K) 





I "" 









" M 


















.. T 

j Ml 



T } 

'!!"! 4 



, A i 

( |--H{) 

1 1 


4 f 


[ T ^ 



^ (D 


the bill negotiated) and the character of the security 
offered. The published Bank Rate in India represents, 
I believe, the rate charged day by day for a loan 
advanced on such security as Government Paper. The 
interest on a loan of this kind, that is to say, is 
calculated day by day at the published Bank Rate 
prevailing on each day. It may be said to correspond, 
therefore, to the London rate for some comparatively 
short period say for fortnightly loans. Because the 
Bank Rate is at 7 per cent, it does not follow, there- 
fore, that money can be used, or obtained, at this 
rate for two or three months. The rate ordinarily 
charged for fine bills of two or three months' currency 
may be either higher or lower than the published 
minimum Bank Rate. Further, the rates published 
by the Presidency Banks may be from time to time 
more or less " effective." The Banks may not always 
be able, that is to say, to do any considerable volume 
of business at their published minima. This would 
not be the case, I believe, in the busy season, so much 
as in the slack season, when the Banks do not let 
their published rates fall below 3 per cent, although 
money may be practically unusable and they would 
probably be glad enough to lend a large sum at 
2 per cent. But these various qualifications do not 
prevent the Presidency Bank Rates from affording 
the best available index for measuring the relative 
ease or stringency of the Indian Money Market. I 
append a chart giving the movements of the Rate of 


Discount at the Presidency Bank of Bengal since 
1S93. 1 

2. The rates, announced by the three Presidency 
Banks, are not always identical, but seldom, if ever, 
differ by more than 1 per cent. Such differences 
as there are chiefly reflect the differences in date 
at which occur the various crop movements with 
which each Presidency is mainly concerned. A wider 
difference of rate tends to be prevented, not only by 
the possibility of moving funds from one part of 
India to another, but also by the fact that the 
Secretary of State is willing to make his Bills and 
Transfers payable at any of the Presidency towns at 
the option of the purchaser. If there is relatively 
greater stringency at one of them, the bulk of the 
Council Bills and Transfers sold in London tend to 
be drawn on that one. The general appearance of 
the chart would not, therefore, have been appreciably 
different if I had chosen Bombay in place of Bengal. 

The official rates move by 1 per cent at a time. 
There have been occasions of movements by 2 per cent, 
but not recently. When the rate is rising or falling, 
however, at the beginning or end of the busy season, 
changes often follow one another in quick succession. 

3. An examination of the chart shows that the 
Indian Money Market enjoys years of high and low 
average rates respectively, just as other markets do. 
But these annual variations, while perfectly notice- 

1 I am indebted for the preparation of this chart to Mr. II. Belliugham of 
the India Office. 




able, are relatively small in comparison with, the 
seasonal changes, which are very great and very 
regular, and which afford the most clear ground of 
differentiation between the Indian Market and those 
with which we are familiar in Europe. 

Let us examine the annual fluctuations of the rate 
in recent years in more detail : 

Bengal Bate per Cent. 

Bengal Bate per Cent. 

Max. rate in 

Min. rate in 

Max. rate in 

Min. rate in 










































From this table and the chart it is safe to make 
the generalisation that the Indian Eate may be 
expected to reach 8 per cent in the winter or early 
spring, and to fall to 3 per cent in summer. Years 
differ from one another chiefly in the length of time 
for which the high and low rates prevail respectively. 
From 8 to 3 per cent is an enormous range for the 
normal seasonal fluctuation. What is the explana- 
tion of it? The Bank of England rate seldom 
exceeds 5 per cent, and in many years falls short of 
this, even in the winter. If there is so regular an 
expectation of obtaining 7 or 8 per cent in India on 
excellent security, why is it not worth some one's 


while to transfer funds to India in the busy season 
on an ampler scale than is the case at present, and 
thus secure the advantage of so wide a discrepancy 
between the English and the Indian rates ? 

4. The facts are to be explained, I think, as 
follows. High rates of 7 or 8 per cent are not 
obtainable in India all the year round. In normal 
years they cannot be relied on to prevail for more 
than about three months. The banker who raises 
funds in London in order to lend them for short 
periods in India has to choose between leaving them 
in India all the year round, waiting after one busy 
season for the next, and bringing them back again 
to London after a comparatively short period. He 
must either accept, that is to say, the rate obtainable 
in India on the average of the whole year, or he 
must earn a high enough rate in the brief busy 
season to compensate him for bearing the expense of 
remittance both ways. 

In considering the difference between two European 
Bank Rates as the cause of a transfer of funds between 
the two centres, the cost of remittance, as measured 
by the difference between the telegraphic rate of 
exchange outwards at the beginning of the trans- 
action and the telegraphic rate of exchange back at 
the end of it, is not, of course, to be neglected. But 
where the two centres are near together and there 
is no reason to anticipate the suspension of a free 
market in gold, this cost is, relatively, a minor 


consideration. The great distance, however, between 
London and India makes it in their case a very 
significant quantity, and a brief calculation shows 
that, measured in terms of Bank Rate, the cost of 
remittance works out higher, perhaps, than unin- 
structed common sense would anticipate. For, under 
present conditions, the cost of remittance both ways 
can hardly be less than ^d. per rupee, rising in most 
years as between certain dates as high as -^-d., and 
reaching occasionally as much as T %d. It would not 
be prudent to act on the expectation of a less cost 
than -^-d. Now /^d. on a rupee is about *6 per cent. 
If this loss on exchange (i.e. on remittance) is to be 
recouped in three months (i.e. in a quarter of a year), 
an additional rate of nearly 2-|- per cent per annum 
must be earned in India as compared with the rate 
in London. If a different degree of loss in exchange is 
anticipated, and if the length of time for which money 
can be used in India at a high rate is expected to be 
more or less than three months, the calculation must 
be adjusted accordingly. In any case the reason why 
the Indian and London Bank Rates can differ from 
one another for short periods by large amounts is 
adequately explained. If, for example, money can be 
employed in India at the high rate for one month only, 
even if the double cost of remittance for that period 
is so low as x^-d., the difference between the London 
and Indian rates must amount to 5 per cent per annum 
to make a transfer of funds prima facie profitable. 


These illustrations show that what seems a very 
small fluctuation in exchange can account for a very 
wide difference in the rate of discount; and, apart 
from questions of unequal knowledge and unequal 
security, it is this possibility of fluctuation that makes 
distinct markets of the two centres. The underlying 
explanation is essentially the same as that of the 
circumstance to which I called attention in 9 of 
Chapter II, namely, that a temporary premium of 
f per cent on gold in those European countries where 
gold is not always freely obtainable, is as effective 
as a very great increase in the Bank Rate in pre- 
venting the remittance of funds abroad and even in 
attracting an inward flow of funds. 

5. This discussion will have served to make 
clear a distinction highly important to the problem 
of the Indian Bank Eate. When we say that the 
Indian Bank Eate is apt to be high, we mean, not 
that the average effective rate over the whole year is 
high, but that the maximum rate in each year, 
effective for periods of shorter or longer duration, is 
generally high. A high average rate and a high 
maximum rate are likely to call for different explana- 
tions and, if a remedy is sought, for different kinds of 
remedies. The available evidence does not suggest 
that the average rate in India is at all unduly high 
for a country in India's stage of economic and 
financial development Some of the Exchange Banks, 
for example, do not find it worth their while to offer 


more than 3J per cent on Indian deposits fixed for a 
year. It is the high maximum rate almost invariably 
reached which calls for enquiry. 

The phenomenon under discussion is in no way 
peculiar to India and does not arise out of those 
features of the Indian system which are characteristic 
of a Gold- Exchange Standard. We find the same 
thing in any country where the demand for funds for 
financing trade is to a high degree seasonal and 
variable in amount throughout the year, and where, 
at the same time, these funds have to be remitted from 
some far distant foreign centre in the countries of 
South America, for example. In fact, by the establish- 
ment of a par of exchange between the rupee and 
sterling, the severity of seasonal stringency has been 
greatly moderated. The exceptionally high Bank Rates 
of 1897 and 1898 were partly occasioned by a natural 
timidity on the part of the Banks in importing funds 
at a rate of exchange which at that time was excep- 
tionally high. The Banks had no guarantee that 
exchange would be maintained at or near the existing 
level, and if they imported funds they ran the risk of 
having to bring them home again at a heavy loss. 
Under present arrangements the maximum fluctua- 
tion in exchange between the busy season and the slack 
is known and limited. But .while the stabilisation of 
the gold value of the rupee has done much for the 
Indian Money Market, and has rendered a 12 per cent 
Bank Rate most improbable except at a time of wide- 


spread crisis and panic, it does not prevent an 8 per 
cent or even a 9 per cent Bank Eate from being a 
comparatively common occurrence. Is it possible to 
conceive of any remedy or moderating influence 
for the somewhat severe seasonal stringency still 
experienced ? 

6. It is clear that a remedy can be sought in one 
or other of two ways only. Either the cost of remit- 
tance and the maximum range of fluctuation in ex- 
change must be reduced, or a new source for the 
seasonal supply of funds must be found in India 
herself. I will discuss these alternatives in turn. 

It will help to make the points at issue plain if I 
begin by taking an extreme ease. Let us suppose 
that exchange between London and Calcutta were 
fixed at Is. 4d., in the sense that the Government were 
always prepared to provide telegraphic remittance in, 
either direction at this rate. Under such circum- 
stances, the London and Indian Money Markets would 
become practically one market, and the large differ- 
ences which can now exist between rates current in 
the two centres for loans on similar security would 
become impossible. The effect of this on the volume 
of remittance would be very great. Every year 
immense sums would be remitted from London to 
India in the busy season and brought back again at 
the end of it, since the fact which now diminishes the 
profitableness of such transactions would have ceased 
to exist. The following illustration shows on how 


large a scale these seasonal movements to and fro 
would probably be. In July the cash reserves of the 
Bank of Bengal might stand, as things now are, at, 
let us suppose, about 1000 lakhs and its discount rate 
at 3 per cent. This reserve might be 400 or 500 
lakhs at least in excess of what prudence required. 
But it would be useless to lower the Bank Eate ; for 
the additional funds were probably not loanable in 
India for the month of July at any rate at all. Yet 
for the reasons already given it would not be worth 
while in existing circumstances for any one to borrow 
this sum and remit it to London, until such time as 
it may be again wanted in Calcutta ; it is better to 
let it lie idle and wait for busier times. But fix 
exchange at Is. 4d. and all this would be changed. The 
Bank's customers would immediately remit the 400 
or 500 lakhs to London, knowing that they could be 
brought back without loss as soon as they were wanted. 
Every one in India having loanable funds to spare 
would act likewise. 

What would be the effect on the Secretary of State 
if he were to lay himself under such an obligation ? 
In order to be in a position to act as universal money- 
changer, and to be able to provide large quantities of 
sterling in London in the slack season, and large 
quantities of rupee funds in India in the busy season, 
it would be necessary for him to keep very much 
larger reserves than he does at present in both 
countries. It might even be necessary for him to 


remit gold backwards and forwards himself, thus bear- 
ing the whole expense of which the Exchange Banks 
were being relieved. At present the possible fluctua- 
tion of exchange between what may fairly be termed 
the "gold points" on either side of Is. 4cl, acts in some 
measure as a protection to the currency and lessens 
the reserves which it is necessary for the authorities 
to maintain ; a falling exchange acts as a drag on re- 
mittance from India and a rising exchange as a drag 
on remittance from London, thus bringing the private 
interests of individuals and the natural forces acting 
on the market into greater harmony with the interests 
of the market as a whole, and with the efforts of the 
Secretary of State to maintain the stability of the 
system. If telegraphic exchange were fixed at Is. 4<L, 
the Indian Bank Eate would closely follow London's, 
but it would be at the expense of forcing the Secretary 
of State enormously to increase his reserves. 

7. I have taken this extreme case in order to 
make emphatic the principles involved in all such 
proposals. But no one is likely to propose the above 
as -a practical policy. More moderate proposals of 
the same kind, however, deserve consideration. Some 
critics, for example, have suggested that the Secretary 
of State should never sell Council Bills in London 
below Is. 4d. This would lessen to a certain extent 
the probable range of fluctuation in exchange and 
might, therefore, diminish the risk of loss involved 
in remitting to India when exchange is high ; but 


the Secretary of State's withdrawal from the market 
would not necessarily prevent exchange from falling 
below Is. 4d. Moreover, in normal times the policy 
actually followed already approximates closely to 
this proposal ; in the last three years the occasions on 
which Council Bills have been sold below Is. 4d, have 
been very rare. And in exceptional times it may be 
some protection to the sterling reserves if Council 
Bills can be sold at a lower rate if necessary. I con- 
clude, therefore, that the advantage of such a policy 
would not be great, probably not great enough to 
outweigh the cost. 

Thus it is not easy to find a remedy for high Bank 
Rate by any method of diminishing the maximum 
range of fluctuation in exchange. Indeed so long as 
the currency arrangements are at all like those now 
in force, this maximum range may fairly be said to be 
determined by forces outside Government control, 
namely, by the forces governing the cost of remittance 
of gold. Though the burden of this cost may be 
shifted, it cannot be easily avoided altogether. 

8. We must fall back, therefore, on the second 
alternative, the discovery of a new source for the 
seasonal supply of funds in India herself. A pro- 
posal, having this object in view, has already been 
put forward in more than one passage in the pre- 
ceding pages. I believe that, in future, the Govern- 
ment of India may have in the busy season a 
considerable stock of rupee funds available in the 


Paper Currency Reserve and, occasionally, a surplus 
stock in the Indian Cash Balances. If a proper 
machinery is set up for lending these out in India, 
I anticipate some appreciable relief to the Bank Rate 
at the season of greatest stringency. Assuming that 
such a policy is practicable on other grounds, let us 
try to compare its precise effect as compared with 
the existing state of affairs, 

9. Broadly speaking, surplus Government funds 
in India can at present be released only by the sale 
of Council Bills in London. When these bills are 
sold at a fairly high rate, the Government gain the 
premium over and above Is. 4d. and are in a position 
to put out at interest funds in London. If the 
funds in India, instead of being released through the 
encashment of Council Bills, are lent out there direct, 
the interest obtained in India takes the place of the 
two sources of gain distinguished above. In the 
first case money is first borrowed from the London 
Money Market (by the Exchange Banks or otherwise) 
for the purchase of Council Bills, and is then lent 
back again to that Market by the Secretary of State. 
In the second case, instead of a double transaction in 
London there is a single transaction in India. It 
might be argued that the two methods come in the 
end to much the same thing; that there can be no 
relief to the Money Market unless the Government 
of India accept a lower rate of interest for sums lent 
out in India than is the equivalent of what they 


would make if they were to sell Council Bills at a 
premium and lend out the funds in England ; and 
that the second method involves no net addition to 
the resources available in India. For the following 
reasons, however, I do not think that this way of 
looking at the matter would be correct. 

In the first place there would be an elimination 
of risk. If the average loss from exchange on funds 
sent out to India for the busy season works out at 
(say) 2 per cent per annum, the Banks, in order to 
recompense themselves for the risk of fluctuations 
beyond the average, would be able to make a difference 
of more than 2 per cent between the current Indian 
and English rates. In the case of funds borrowed 
in terms of rupees and repayable in terms of rupees, 
this element of risk is absent ; and the elimination 
of it provides a source of net gain. If the effect of 
Government lending in India were to mitigate the 
seasonal stringency there, some lowering of the 
normal upper limit of fluctuation of exchange might 
result. In so far as this was the case, in normal 
years the consequences would be outwardly similar to 
those of the first alternative, discussed and rejected 
above, whilst the Government would not have bound 
themselves by any undertaking capable of turning 
out burdensome. 

Secondly, the rate of interest which the Secretary 
of State can earn on loans in London is appreciably 
lower, on account of the short period for which he 


lends and the nature of the security he requires, than 
the normal rate at which the Exchange Banks would 
raise their funds there, and a good deal lower than 
what would be obtained by direct lending in India. 
(It should be admitted, on the other hand, that the 
practice of lending funds in India would probably 
involve some sacrifice of perfect safety as compared 
with the present arrangements.) 

And, thirdly, it is not clear that it might not 
sometimes be feasible to lend out in India sums 
additional to those which would in fact be released 
under the present system, so that there would be 
some net addition to the resources available in India. 

10. In addition, therefore, to the grounds for 
making loans in India from the Paper Currency 
Reserve which I have given in earlier chapters, I 
believe that it is in this direction that the best hope 
lies of a remedy for the high level which the Indian 
Bank Eate commonly reaches in the course of each 
busy season. I do not feel in a position to say 
anything very decided as to the manner in which 
such loans could be best made. But there is a 
presumption, I think, that, in the absence of a State 
Bank, they must be made, mainly if not entirely, 
through the Presidency Banks. And I believe that 
the Government would act advisedly if, as a general 
rule, 5 or 5^ per cent were the highest rate they ever 
chose to exact from the Banks. In financial matters 
of this kind there is a danger lest Governments prove 


too jealous of the profits of private persons. In a 
case where the co-operation of private persons is 
necessary, they must be allowed a reasonable share of 
the profits of the transaction. In their past relations 
with the Presidency Banks in the matter of temporary 
loans, the Government of India have sometimes 
seemed to attach more importance to preventing the 
Banks from making any profit out of the loans than 
to any other aspect of the transaction. I may repeat 
that the loans I contemplate are to be for the 
busy season only, and that they should not be made 
until the expectation of a normal or successful harvest 
is reasonably assured. 

11. In the nature of a postscript to the above 
proposals, it may be instructive to consider them 
in the light of the actual circumstances of the season 
1912-13. The peculiarity of this season from the 
point of view of the Indian Money Market was the 
combination of a high Bank Rate in India for a 
comparatively long period l with a relatively low rate 
of exchange and only a moderate demand for Council 
Bills and gold. At the end of 1912 the situation 
could have been described as normal. The Bank 
Rate was at the somewhat high level usual at that 
time of year ; exchange was high (the minimum rate 
for the allotment of Council Bills being Is. 4-^d.); 
and the demand for Council Bills was on a large scale. 

1 The Bengal Bank Rate was at 7 or 8 per cent from November 28, 1912, 
to April 17, 1913, and the Bombay Bank Rate at no less than 8 per cent from 
December 27, 1912, to April 3, 1&13. 


But from. January to March, although the Bank Rate 
remained at a high level and trade was active, the 
demand for Council Bills fell away, slowly at first 
and rapidly during March, exchange dropping pari 
passu until, during the latter half of March, the 
minimum rate at which Council Bills were allotted 
fell so low as Is. 3fjd. The combination of so low 
a rate of exchange with an 8 per cent Bank Eate at 
Bombay was very abnormal. 

It is dangerous for a writer who is not in touch 
with the practical side of the Money Market to venture 
on an explanation of current events. But 1 will give 
my explanation for what it is worth. The poor de- 
mand for Council Bills in March 1913 is not to be 
explained by the competition of gold as a means of 
remittance ; for the low level of exchange did not 
favour the importation of sovereigns (even from Egypt, 
except earlier in the season), and as a matter of fact 
the import of them was on a very much smaller scale 
than in the previous year. It must have been due, 
therefore, to an unwillingness on the part of the Ex- 
change Banks and others to lay out money in London 
for the purchase of remittance to India. This un- 
willingness was due to a variety of causes. The lock- 
up of funds in silver and opium, and the freedom with 
which India was purchasing foreign goods, probably 
had something to do with it ; and an important con- 
tributory influence was the dearness 1 of money in 

1 The Bank of England's rate was 5 per cent, with the market rat's well 


London combined with, a sufficient expectation of 
cheaper money soon, to provide an incentive to delay, 
wherever delay was possible. A precise diagnosis of 
the causes of the unwillingness on the part of the 
Banks to buy Council Bills is not necessary, however, 
to the lesson I seek to enforce. For whatever reason, 
Indian Bank Rates of 7 and 8 per cent, even in com- 
bination with a very low level of exchange, did not 
in fact tempt the Banks to buy Council Bills on 
any considerable scale. What was the effect on 
the Government Balances in India? The ordinary 
method, by which the rupees accumulating in the 
Eeserve Treasuries from the proceeds of taxation are 
quickly released and given back to the Money Market, 
the encashment, namely, of large volumes of Council 
Bills, had failed. The position was aggravated by the 
large realised surplus, much of which was to be de- 
voted to expenditure only in the next financial year, 
and which in the meantime was swelling the Govern- 
ment Balances in any case beyond their usual dimen- 
sions. So far, therefore, from assisting the market, the 
Government were busy increasing the stringency by 
taking off the market, week by week, rupees which for 
the moment they did not in the least want. Already 
at the end of 1912 (see table on p. 188) the sums lying 
idle in the Eeserve Treasuries were unusually high. 

up to the Bank Rate ; and the difference between the current rates for money 
in London and India was probably, for the time of year, not much greater 
than usual. 


By the end of February 1913, the total Government 
Balances in India had risen to 17,400,000, and by 
the end of March to 19,300,000, of which 8,000,000 
lay in the Reserve Treasuries. What Money Market 
in the world could have seen such sums taken out of 
its use and control at one of the busiest moments of 
the year without suffering a loss of ease ? 

The situation was not due, in my judgment, to 
any ignorance or incompetence on the part of the 
executive officers of Government, but to a system which 
provided them with no sort of appropriate machinery 
for dealing with the position. The "Independent 
Treasury System" and the traditional aloofness of 
Government from the Money Market were seen at 
their worst. Millions of rupees were lying idle in the 
Government Treasuries at the time of year when there 
was most work for them to do outside. The sort of 
arrangements I have outlined in earlier paragraphs 
might have done something, I feel sure, to ease the 
situation. One can point, therefore, to the first quarter 
of 1913 as a specific occasion on which Government 
could have lent sums in India with profit to itself, with 
advantage to the Money Market, and without incur- 
ring any risk of which it need have been afraid. 

12. I have now completed my discussion of these 
questions. Two points I would end by emphasising. 
The first affects my general treatment of the subject 
matter. I have trie$ to bring out the fact that the 
Indian system is an ex'ceediiigly coherent one. Every 


part of the system fits into some other part. It is 
impossible to say everything* at once, and an author 
must needs sacrifice from time to time the complexity 
and interdependence of fact in the interests of the 
clearness of his exposition. But the complexity and 
the coherence of the system require the constant 
attention of anyone who would criticise the parts. 
This is not a peculiarity of Indian Finance. It is the 
characteristic of all monetary problems. The difficulty 
of the subject is due to it. 

My second point affects the kinship of Indian 
arrangements to those lately developed in other parts 
of the world. Indian affairs are so exclusively studied 
by those whose knowledge and experience is preponder- 
antly Indian or English, that the true perspective 
of India's development is sometimes lost; and the 
value of foreign experiences neglected. I urge that, 
in her Gold -Exchange Standard, and in the mechanism 
by which this is supported, India, so far from being 
anomalous, is in the forefront of monetary progress. 
But in her banking arrangements, in the management 
of her note issue, and in the relations of her Govern- 
ment to the Money Market, her position is anomalous ; 
and she has much to learn from what is done elsewhere. 


Adie, Mr., 149 ff. 

Atkinson, F. J., 151 ff. 

Australian sovereigns, remittance of, 

to India, 115-116 
Austro-Hungarian Bank, 24, 32, 33, 


Bagehot, W., 162, 177 
Balances. See Cash Balances 
Balkan War, effect of, on gold 

markets, 23, 165 
Bank Rate in India, 105, 163, 164, 

196-198, 240 ff. 
Banking in India, 195 ff. 
Banking Reserves in India, 147, 160, 

161, 204-205, 215-218, 224- 

227, 232 
Banks with small paid-up capital, 


Bengal, Bank of, 182, 198 ff., 234 
Bombay, Bank of, 182, 199 ff. 
Bombay, proposed mintage of gold 

at, 64, 67-68, 84-87 
British monetary system, 15-19, 69 
Brunyate, J. B., 3, 38 n., 181 n., 

199 fl,., 201, 234 
Burma, Bank of, 222, 225-226 

Cash Balances in India, 60-61, 127- 

129, 131, 181-190 
Cash Balances in London, 128-129, 

143-144, 190-192 
Central Bank for India, 58-59, 161, 


Cheque system, 16, 39 
China, Currency for, 36 
Circles of issue for Paper Currency, 


Co-operative Credit Societies, 227 n. 

Council Bills, 102 ff., 132, 210 ff., 

Crewe, Lord, 89 

Crisis of 1907-8, 135-141, 159, 164, 

Currency Reserve. See Paper Cur- 
rency Reserve 

Currency notes of India. See Paper 

Dadabhoy, Hon. Mr., 13 n. 
Dawkins, Sir Clinton, 64 
Depreciating rupee, effects of, 2-3 
Dickson, Mr., 234, 238 

Egyptian gold shipped to India, 116- 

Egyptian system of currency, 29 %., 

71 n. 
Elasticity of Indian currency system, 

57-58, 60-62, 180-181, 251- 

English and Indian Bank Rates, 

their differences accounted for, 

English institutions, influence of, on 

Indian, 38-39, 52, 59, 201%., 

231, 239, 259 
Exchange Banks, 103, 158, 163, 


Fowler Committee, 4, 7, 34, 50, 63, 

196, 235 
France, Bank of, 20-21 

Gauntlett, M. F., 76 




German Reichsbank, 19-22, 70, 239 

Gillan, R. W., 76, 77, 78 

Gold, amount of, circulating in 

India, 75-84 

Gold Currency in India, 63-101 
Gold, methods of checking a foreign 

drain of, 17 ff. 

Gold, premium on, 23, 26-27, 246 
Gold, 10-rupee coin, 68, 84, 87-88 
Gold-Exchange Standard, 10-11, 30- 

36, 106 ff., 119-120 
Gold-Exchange Standard, transition 

to, 27-30 

Gold import point, 114 ff. 
Gold not the principal circulating 

medium in countries having a 

gold standard, 69-71 
Gold Note Act of 1898, 48 
Gold Reserves, division of, between 

India and London, 28, 48-tfO, 

126-127, 131, 174-178 
Gold Standard Reserve, 8, 90, 107, 

110 ff., 125-127, 1&0-131, 137, 

143, 170 ff.' 
Goschen, Lord, 69, 72, 91 

Hambro, E., 235 
Harrison, F. C., 149 ff. 
Herschell Committee, 7, 33 
Hoarding, 77-78, 81, 85-86, 99-101, 

153, 158-160, 165-166, 225 
Holland, Bank of, 32, 239 
Home Charges/ 102, 120-12^2, 171- 


Indian, Bank Rate. See Bank Rate 
in India % " , , '' 

Indian" Banking, 195 ff. 

Indian currency system, 1893-1899, 
1-3; since 18.99; 4-6, 8-10; 
main features as now estab- 
lished, 6-7, 10-11 ; reference, 
dates, 7-8 ; -future development, 
194, 258-259 

Indian Joint Stock Banks, 221-226 

Indian Money Market, 195-198, 
240 ff. 

Indian Treasury. See Reserve 
Treasury System 

Japanese system of currency, 27, 

28 n. 

Java, currency of, 27, 35 
Jevons, W. S., 99, 149 

Lindsay, A. ML, 5, 34, 72 w., 238 

Madras, Bank of, 199 ff. 
Marshall, A., 31 
Meston, Sir James, 67 
Mill, J. S., 72 

Northbrook, Lord, 182 

Note circulation in India. See 

Paper Currency, volume of 
Note currency of India. See Paper 

Note issue by Banks, 38, 199-200 

Paper Currency, 37 ff. 

Paper Currency, volume of, 46-47, 

53 ff. 

Paper Currency Reserve, 40, 48 ff., 
-89, 97, 127, 130-131, 170 ff., 

189, 254 
Post Office Savings Banks, 158, 227- 

Presidency Bank Rates. See Bank 

Rate in India 
Presidency Banks, 38, 53 n., 56, 60, 

158, 163, 181-186, 198-206, 

234, 240-243 

Reserves of Government. Sec Rupee 
Reserves, and Sterling Reserves 
Reserves of Indian Banks. See Bank- 
ing Reserves in India 
Reserve Treasury System, 56-57, 

129, 181-189, 257-258 
Ricardo, 31, 72 
Rothschild, Lord, 35 
Rupee, legal position of, 6-10 
Rupee circulation of India, 149-155 
Rupee Reserves of Government, 132- 

133, 141-147 

Rupees, coinage of, 131-135 
Rupees, profit on coinage of, 36, 124- 


Russian Finance and Currency, 24. 
27, 32 

Salisbury, Lord, 183 
Savings Banks. See Post Office 
Savings Banks 



Seasonal demand for money in India, 

53-56, 57-58, 146-147,180-181, 


Shroffs, 195-198 
Silver purchases by Government, 

132-135, 142-146 
Sleigh, J. H., 196 
Sovereigns, circulation of, in India, 

6-10, 73-74, 76-84, 94-96, 115- 

State Bank for India, 233-239. See 

also Central Bank 

Sterling Reserves, 137-140, 147- 
171, 193 

Telegraphic transfers, 105, 137, 210- 

Thackersey, Sir Yithaldas, 67 

United States Independent Treasury 
System, 56-57 

Wilson, James, 38 

Wilson, Sir G. Fleetwood, 64, 67 

Wood, Sir Charles, 39 n. 

Printed &y R. & R. CLARK, LIMITED, Edinburgh.